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Foreign Tax Credit for taxes paid on Capital Gains on equities

Forum|Forum|1 year ago
September 7, 2024
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I have short and long term capital gains from sale of shares in stocks that I held in India. I have paid taxes in India on these gains. Can I take credit for these taxes in Form 1116?

Best answer by muralinn

@muralinn -ji, thank you very much for your detailed response to my questions.

1. Gains from alienation of assets ( equities, real-estate business etc. ) and taxed by a foreign taxing authority and whom has a tax treaty with the USA is eligible for foreign tax credit / deduction. IRS instructions form 1116 is my ref. Please see pages 2. 3 and 6 for this ---> 2023 Instructions for Form 1116 (irs.gov)

2. Note that the gain amount that is taxed by both US and that other country ( India in your particular case ) is the gross amount of foreign source income ( it is actually the lesser of the gain per US laws and that per the tax laws of the other country ). For purposes of form 1116 the taxes paid is the actual amount paid/accrued/ levied by the other country.

3. Note that the form 1116 recognizes the total foreign taxes paid but limits the amount allowable for the tax year to the lesser of actual taxes paid and "allocated" US taxes paid/levied on the foreign source income. Thus it is generally not 100% of the taxes paid to a foreign taxing authority. That is why the questions about the filing status and the quantum of the foreign taxes paid ---- the safe harbor amount being US$300 per filer.

Does this make sense ? Is there more I can do for you ? If you need more , please feel welcome to add to this thread OR you can PM me if you feel the situation will not be of interest to general public ( again no Personally Identifiable Information please ).

Namaste Murali ji

pk

Hi pk-ji:

Below is what I got for a cross-border tax attorney. Net: One CANNOT take credit for taxes paid in India on capital gain from sale of stocks. See below for details.

I am interested in your views as well.

According to Article 25 of the DTAA. the US shall allow its residents or citizens to claim a tax credit in the US on income tax paid to India. Therefore, accordingIy this Article 25, taxes paid In India on capital gain on shares and securities (in the form of TDS or otherwise) should be allowed to be claimed as tax credit in the US. However, there is more to this.

Article 25 Further slates that 'the determination of the source of income for purposes oF this Article shall be subject to such source rules in the domestic laws of the Contracting States as apply for Ihe purpose of limiting the foreign tax credit. And here is where the trouble begins. According to the US tax code, in order to claim a tax credit or taxes paid in another country, the income must be “foreign sourced." According to IRC Sec 865, income from sale of personal property by a US resident shall be sourced in the U.S. So if you are a US person (that is US citizen, resident or green card holder) and you sell securities in anoiner country they will be treated as US sourced. So foreign tax credit will not be available on such income. What this means Is that you will pay tax in India on your capital gains. You will also end up paying tax In the US on this income with no benefit of tax credit.

A

Anonymous_

Employee

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pk12_2

Employee

@muralinn , Namaste ji.

As I understand from you short post, you a US person ( citizen/GreenCard/ Resident for Tax purposes ) have sold equities ( when acquired, when sold,) paid Indian tax ( finalized or just the usual 20% or more collected at source).

Now the question you are raising is if you are eligible to use Foreign Tax Credit to mitigate the double taxation of this foreign source income ( I am assuming here that these equities are bought / sold through your broker in India and/or these equities are placed/ listed ONLY in India.

While , I await your answer (s ) to the questions I have asked ( the parenthetical items above ), in general because India and US have a Tax Treaty in place , including the double Taxation clause, YES indeed you could use the Foreign Tax Credit/ Deduction to ameliorate the effects of double taxation.. Whether you should use the form 1116 really depends on your filing status and the quantum of the total foreign tax levied / paid on this foreign income..

Because you have both short-term and long-term gains ( per US tax laws ) you need to be careful to make sure that your total foreign source income and foreign taxes paid thereon be properly allocated. / accounted for.

I will circle back once I hear from you .

Namaste ji

pk

M

muralinnAuthor

@pk12_2-ji

Thank you very much. More clarifications embedded with your response.

As I understand from you short post, you a US person ( citizen/GreenCard/ Resident for Tax purposes ) have sold equities ( when acquired, when sold,) paid Indian tax ( finalized or just the usual 20% or more collected at source).
[murali] Correct. I am a US citizen and residing in the US. I have a brokerage account in India that is managed by a management company. We have already filed our Indian tax returns & paid the taxes in India (not just collected at the source). Now we are in the process of filing our 2023 US Income tax.

Now the question you are raising is if you are eligible to use Foreign Tax Credit to mitigate the double taxation of this foreign source income ( I am assuming here that these equities are bought / sold through your broker in India and/or these equities are placed/ listed ONLY in India.

[murali] My question is not about eligibility. I get credit on taxes paid on rental income and dividends from the stocks I own. What is not clear if I can take credit on capital gain taxes on STOCKS I have sold. I know I CAN take credit on the taxes paid on gains from real properties (e.g. real estate) but it is not clear to me if I can take credit for taxes paid in India on the capital gains associated from the Indian stocks in India.

While , I await your answer (s ) to the questions I have asked ( the parenthetical items above ), in general because India and US have a Tax Treaty in place , including the double Taxation clause, YES indeed you could use the Foreign Tax Credit/ Deduction to ameliorate the effects of double taxation.. Whether you should use the form 1116 really depends on your filing status and the quantum of the total foreign tax levied / paid on this foreign income..

Because you have both short-term and long-term gains ( per US tax laws ) you need to be careful to make sure that your total foreign source income and foreign taxes paid thereon be properly allocated. / accounted for.

[murali] Looking forward your reply. Thanks.

P

pk12_2

Employee

@muralinn -ji, thank you very much for your detailed response to my questions.

1. Gains from alienation of assets ( equities, real-estate business etc. ) and taxed by a foreign taxing authority and whom has a tax treaty with the USA is eligible for foreign tax credit / deduction. IRS instructions form 1116 is my ref. Please see pages 2. 3 and 6 for this ---> 2023 Instructions for Form 1116 (irs.gov)

2. Note that the gain amount that is taxed by both US and that other country ( India in your particular case ) is the gross amount of foreign source income ( it is actually the lesser of the gain per US laws and that per the tax laws of the other country ). For purposes of form 1116 the taxes paid is the actual amount paid/accrued/ levied by the other country.

3. Note that the form 1116 recognizes the total foreign taxes paid but limits the amount allowable for the tax year to the lesser of actual taxes paid and "allocated" US taxes paid/levied on the foreign source income. Thus it is generally not 100% of the taxes paid to a foreign taxing authority. That is why the questions about the filing status and the quantum of the foreign taxes paid ---- the safe harbor amount being US$300 per filer.

Does this make sense ? Is there more I can do for you ? If you need more , please feel welcome to add to this thread OR you can PM me if you feel the situation will not be of interest to general public ( again no Personally Identifiable Information please ).

Namaste Murali ji

pk