GlossaryAdvanced
Foreign Tax Credit
A credit that reduces domestic tax owed by the amount of tax already paid to a foreign jurisdiction on the same income, reducing double taxation.
A foreign tax credit reduces the tax owed to a taxpayer's home jurisdiction by (up to) the amount of tax already paid to a foreign jurisdiction on the same income or gain, specifically to reduce the double-taxation risk a Double Taxation Agreement (see Kaavon's "Double Taxation Agreement" glossary definition) is also meant to address.
The credit is generally capped at the amount of domestic tax that would otherwise have been owed on that same income, meaning it reduces or eliminates double taxation but doesn't necessarily refund foreign tax paid in excess of the domestic liability.
Examples
- A foreign tax credit lets a taxpayer offset domestic tax owed by tax already paid abroad on the same crypto gain, rather than paying the full amount twice.
- A foreign tax credit is generally capped at the domestic tax that would otherwise be owed, not a full refund of whatever was paid abroad.