Stock trading from a Cash account, living abroad and United States tax implications

Question

I am an United States Citizen, my 2 children and fiancee are also U.S. citizens.

For the entire year of 2015 I will have lived in Mexico, about 2 hours from San Diego. I will pass the IRS's physical residence test and be able to take a 100k deduction on my income via the Foreign Income Tax Credit or I will use FEIE (Foreign Earned Income Exclusion)

So I trade stocks out of a United States TD Ameritrade cash account. Say I make $40,000 in short term gains for 2015 (I wish that were true, more like 4k for 2015).

How is this income treated, does the Foreign Income Tax Credit or FEIE reduce my tax liability against my United States cash stock trading account short term gains?

Answer 1

Foreign Earned Income Exclusion (FEIE) only applies to earned income: salary/self-employment income. It doesn't apply to any passive income, including capital gains (any term).

You can use the foreign income tax credit, but that will require some math exercise to combine with the FEIE (since you'll need to determine the foreign tax attributable to income excluded, and not include that portion in the FTC calculations).

Also, the foreign income tax credit is divided based on the taxed income type, so for passive income you can only apply tax credit for tax paid on passive income in Mexico. I.e.: if the capital gains tax in Mexico is lower than in the US - you won't eliminate the US tax completely, despite the fact that your overall tax in Mexico may be higher than your overall tax in the US.