Wednesday, April 15, 2015

Careful with Spanish short term capital gains and US foreign tax credit

For 2014 (and only 2014, as the Spanish government realized they had done really stupid), short term capital gains (ie 1 year or less) are taxed at your general income marginal rates (up to 52% yeah!) instead of as part of your savings base (which is taxed separately around 21%).

Normally, when you do your US foreign tax credit, you calculate it separately in two buckets: first for your general income (salary etc), then for passive income (interest, dividends, capital gains, etc). (There are a couple more special buckets).

Now comes the annoying part: any passive income that is taxed at a rate higher than the highest US marginal rate (39.6%) gets “kicked out” of the passive bucket and put into the general bucket. The reason this is annoying is that you cannot use buckets to offset against each other. You overpay your capital gains at 52%, but underpay your interest (21%), but you can’t apply one against the other.

Luckily this is going away next year.


Juan said...

Wow. talk about tax predictability.f

But isn't this better in your case? Since in Spain taxes are in a smaller tax bracket for short term gains, the US taxes will never offset them

But if they go in the same bucket than your salary (assuming your salary is much more than the short term gains), it may be offset.

Anonymous said...

Any idea at which rate a professional trader would be taxed who is a U.S. Citizen? All of my income is derived from options and futures on US markets