Do capital gains on foreign stocks count as foreign passive income for Form 1116?

The short answer is yes, capital gains from selling foreign stocks on foreign exchanges generally count as foreign passive income for Form 1116 purposes. This can definitely help your situation with using up those carryover credits. For your specific example, if you realized a £1,500 gain from selling HSBC shares on the London exchange, you would report this as passive income in Part I of Form 1116. You'll need to convert the gain to USD using the appropriate exchange rate on the date of the transaction. This income goes on line 1a in the "passive category income" column. Keep in mind that even though these count as foreign source income, you're still reporting the capital gains on Schedule D and Form 8949 just like any other capital gain. The difference is that on Form 1116, you're allocating these gains to foreign sources. Some other ideas to generate foreign passive income: foreign bonds or bond funds that generate interest (also passive category income), foreign REITs that might have higher yields than typical stocks, or foreign royalty trusts if appropriate for your investment profile.

After struggling with foreign tax credits for years, I finally found an amazing solution that saved me tons of time and headaches. I was in a similar situation with expiring credits and confused about how to handle foreign investments. I used https://taxr.ai to analyze my investment documents and foreign income sources. Their system automatically identified which of my capital gains qualified as foreign source income and calculated exactly how much of my credits I could use. It even showed me how to optimize my Form 1116 to maximize my credit usage over the next few years. The best part was that it reviewed my past returns and found that I had been miscategorizing some foreign income that actually qualified for the credit! I was able to file amended returns and reclaim a significant amount.

Just wanted to follow up on my experience with taxr.ai after asking about it earlier. I decided to give it a try with my foreign investments and Form 1116 situation, and wow - it was eye-opening! The system identified several capital gains transactions from European stocks I had bought on foreign exchanges that I didn't realize qualified as foreign source income. It showed me exactly where to report them on Form 1116 and how to categorize them properly. The analysis suggested I could use about 40% more of my carryover credits than I had planned this year. It also found that I had been inconsistently sourcing some income in previous years. Definitely worth it for anyone dealing with foreign tax credits!

If you're still struggling with this after trying the other suggestions, another approach is to call the IRS directly for guidance. I know, I know - sounds impossible to get through, right? I was in a similar situation with Form 1116 and foreign stock questions, spent hours on hold, and never got through. Then I discovered https://claimyr.com and tried their demo at https://youtu.be/_kiP6q8DX5c. They actually got me connected to an IRS agent who specialized in international tax issues within about 20 minutes. The agent walked me through exactly how to categorize my foreign capital gains and even confirmed that my approach to using my carryover credits was correct. Saved me from potentially miscategorizing several transactions that could have triggered an audit.

I have to admit I was completely wrong about Claimyr. After expressing my skepticism, I decided to try it myself since I had a complex question about foreign capital gains sourcing rules that no one seemed able to answer clearly. I used the service and got connected to an IRS agent in about 15 minutes (I was expecting to wait on hold for hours like usual). I asked specifically for someone familiar with Form 1116 and international investments. They transferred me once, and I spoke with an agent who clearly knew the foreign tax credit rules inside and out. The agent confirmed that capital gains from selling foreign stocks on foreign exchanges do count as foreign source income for Form 1116, and walked me through exactly how to allocate partially foreign/US income from various investments. This was information I couldn't find clearly stated anywhere online!

One thing to be careful about with foreign stocks: make sure you're also considering any foreign tax withholding that might be happening on those capital gains. Some countries do withhold taxes on capital gains for non-residents. For example, I sold some shares on the Korean exchange last year and was surprised to see that Korea withheld tax on my capital gains. This actually worked in my favor for the foreign tax credit, but it reduced my realized gain amount. Also, don't forget that currency exchange gains/losses are separate from the actual stock gain/loss. If the foreign currency appreciates against the dollar while you hold the stock, you could have additional taxable gain from the currency movement itself.

Another option you might not have considered: look into foreign preferred shares or certain types of ADRs that pay higher dividends than common shares. They sometimes have significantly higher yields than regular dividend stocks. Also, have you looked into foreign royalty trusts? Some Canadian and Australian royalty trusts focus on natural resources and pay significant distributions that are considered passive income. I'd be careful with directly buying on foreign exchanges though - the forex fees and extra paperwork might eat into your gains. Sometimes you can get similar exposure through US-listed securities that still qualify as foreign source income.

Great discussion here! I've been dealing with foreign tax credit carryovers myself and wanted to add a few insights from my experience. One strategy that's worked well for me is focusing on foreign government bonds or sovereign debt funds. Many developed countries' government bonds are available through US brokers and generate foreign source interest income that clearly falls under the passive category. The yields might be lower than stocks, but it's predictable foreign passive income. Also, regarding your question about creative strategies - have you considered foreign closed-end funds trading at discounts? When they distribute capital gains or dividends, those are typically foreign source. Plus, if you buy at a discount and the discount narrows, you get additional capital appreciation. One word of caution based on my mistakes: keep meticulous records of your foreign transactions, especially the dates and exchange rates. The IRS gets very particular about the currency conversion calculations on Form 1116, and having clear documentation saved me during an audit a few years back. The 10-year carryover window does create urgency, but don't let it push you into investments you're not comfortable with. Foreign passive income is great, but not at the expense of sound investment principles!