We propose a first-principles scheme for the description of the magneto-optical Kerr effect within density-functional theory (DFT). Though the computation of Kerr parameters is often done within DFT, starting from the conductivity or the dielectric tensor, there is no formal justification to this choice. As a first step, using as reference materials iron, cobalt, and nickel, we show that pseudopotential based calculations give accurate predictions. Then we derive a formal expression for the full dielectric tensor in terms of the density-density correlation function. The derived equation is exact in systems with an electronic gap, with the possible exception of Chern insulators, and whenever the time-reversal symmetry holds and can be used as a starting point for the inclusion of local fields and excitonic effects within time-dependent DFT for such systems. In case of metals instead we show that, starting from the density-density …