Careful this year with US foreign tax credits for Spanish short-term capital gains

This year Spain has changed the rules for how short term capital gains are taxed. Instead of being taxed at a fixed rate, they are now included as part of your general income, and taxed at your top marginal rate.

Depending on your marginal rate, this may trigger a “high-tax kickout” for your US foreign tax credits, which means that your short term capital gains/tax credits are no longer passive income, but have been magically transformed into general income.

The rule itself says: “Foreign source passive taxable income is removed from the passive income basket of a taxpayer if that income has been subject to an average effective tax rate above the top U.S. marginal rate applicable to that taxpayer”