eToro Trading - USD TO GBP (CGT)

love2learn

Hi,

For anyone who knows how social trading works, I'm sure it needs no introduction. If I trade on eToro and have a CGT gain to work out..

Do I have to work out the exchange rate between USD/GBP for the purchase cost and disposal value for each and every trade I make?

Or can I just say I invested X amount, I have Y amount at the end of the tax year in USD. Convert the gain into USD for the day I make the return and pay the tax?

The reason I ask is, eToro provides a spreadsheet or pdf of the profit/loss for each individual trade, but it's quoted in USD. Can't I just say I made or lost X amount of USD during the tax year, convert it into pounds when filing the return and pay the tax?

This makes more sense to me, since the only time conversion from GBP to USD and USD to GBP actually happens is when funding or withdrawing money from the account. Once the money is in the account it's already converted to USD and therefore trades in USD the entire time the money is there.

londoninvestor

love2learn wrote: »

Do I have to work out the exchange rate between USD/GBP for the purchase cost and disposal value for each and every trade I make?

Yes you do.

love2learn wrote: »

Or can I just say I invested X amount, I have Y amount at the end of the tax year in USD. Convert the gain into USD for the day I make the return and pay the tax?

The reason I ask is, eToro provides a spreadsheet or pdf of the profit/loss for each individual trade, but it's quoted in USD. Can't I just say I made or lost X amount of USD during the tax year, convert it into pounds when filing the return and pay the tax?

HMRC is unequivocal that you can't do this: link

HMRC wrote:

You [i.e. a tax inspector] should not accept a contention that the gain or loss on an asset acquired and disposed of for foreign currency should itself be computed in foreign currency and then converted into sterling at the rate ruling at the time of the disposal of the asset. The decision in Bentley v Pike, 53TC590, that the capital gains computation had to be worked in sterling was confirmed in the case of Capcount Trading v Evans, 65TC545.

londoninvestor

btw, I note that some transactions on eToro are actual purchases of shares, and some are CFDs (e.g. shorting a share).

However, the same principle applies for both. CFDs are treated as futures for tax purposes, and the "cost of acquisition" is based on the exchange rate at the point of entry into the contract, just like when you buy a stock.

HMRC example using USD-denominated gold futures.

love2learn

londoninvestor wrote: »

btw, I note that some transactions on eToro are actual purchases of shares, and some are CFDs (e.g. shorting a share).

However, the same principle applies for both. CFDs are treated as futures for tax purposes, and the "cost of acquisition" is based on the exchange rate at the point of entry into the contract, just like when you buy a stock.

HMRC example using USD-denominated gold futures.

Thanks for the replies, that makes it clear. It must be done, but wow... that would take an insane amount of time to do. They should come up with an easier way to do it.

... with regards to the exchange rates to use on both the purchase and disposal values... I notice HMRC lists the average monthly exchange rates. So if I place say 100 trades during a month, do I simply use the average rate for that month? Or is there somewhere else to obtain the exact exchange rate for each individual day and time that I need to use?

https://www.gov.uk/government/publications/hmrc-exchange-rates-for-2018-monthly

love2learn

Here's something else I don't understand. Say I put $100,000 into an eToro account at the start of the tax year. And that costs me £80,000

When I buy a CFD I'm paying for it with the USD that has already been converted from GBP to USD at whatever the exchange rate was on the day of conversion. The day I funded the account.

Say for example I then decide to purchase a CFD 2 weeks later, and during that two weeks the value of the GBP has risen significantly against the value of the USD. That means if I then use the higher exchange rate on the day I purchase the CFD in my CGT calculations I would be taxed on a gain I haven't even made.

I can't buy more units in the USD priced CFD because I'm not using GBP to buy it, because the GBP had already been converted from GBP to USD two weeks ago using a lower valued pound. So I'm then buying the USD CFD using USD.

So by using that higher valued GBP/USD exchange rate at the time of buying the CFD in my CGT calculation... than the exchange rate I actually got when I funded the account... I'm actually having to pay tax on gains I haven't even made.

So after the account has been credited, there is no further conversion happening when I'm buying and selling the CFD's. The CFD's are bought/sold using the USD from the original conversion. So HMRC wouldn't lose any money in tax if I simply said... I credited my account with say $100,000 this cost me £80,000, I then made $50,000 profit on top of the $100,000 so my gain is $50,000. To realise that gain I would need to convert it back to sterling which would then give me the actual amount I made for the year... not what HMRC wants me to pretend I made by using exchange rates that weren't even a factor when buying the CFD's since the CFD's were not bought using GBP and no actual conversion had to take place during each of the transactions.

I'm not saying this is how HMRC do it, obviously I read the link you posted, I can see what appears to be the way they want it calculated. But I assume this is them assuming each time the asset is bought and sold it's being bought and sold using GBP and a conversion happens each time the buy/sell happens at the current exchange rate on the day?

This is not happening, so unless they recognise that.. then HMRC are asking traders to use exchange rates that weren't even a factor as no conversion took place at the time of the "arms length barter".

Does that make sense?

love2learn

Am I missing something here? Doesn't that look like HMRC are taxing money that's never even been made?

For the tax to be fair, I think it should be a case of saying I made X amount of USD during the tax year. When I convert that gain back to sterling by withdrawing the amount to my account... I get X amount of GBP and that then becomes the realised gain, and should be taxed accordingly.

To tax someone on the basis of an exchange rate that they never actually paid to buy the asset in the first place, can't be right... and if it is, then their rules are wrong and need changed.

antrobus

love2learn wrote: »

Am I missing something here? Doesn't that look like HMRC are taxing money that's never even been made?

For the tax to be fair, I think it should be a case of saying I made X amount of USD during the tax year. When I convert that gain back to sterling by withdrawing the amount to my account... I get X amount of GBP and that then becomes the realised gain, and should be taxed accordingly.

To tax someone on the basis of an exchange rate that they never actually paid to buy the asset in the first place, can't be right... and if it is, then their rules are wrong and need changed.

Your problem is that (since 6 April 2012) foreign currency bank accounts are exempt from CGT. So yes, you could make USD 100,000 of CGT profits and get taxed on GBP 80,000, only to find that you only get GBP 75,000 when you cash out. But similarly you could get GBP 85,000 when you cash out.

But I'm not sure why this should be a problem. If you're smart enough to make money trading CFDs in cable, you should be smart enough to time your cash outs so you don't lose any money.

Of course, since you're trading CFDs it's also very possible that you'll get it all wrong and not make anything at all. According to the FCA, 82% of people lose money on CFDs. But it's your party.

love2learn

That's not what I mean mate. I don't mean the amount I may lose or gain when I withdraw money from the account. I know I can win or lose when I take money out of the account.

I mean when I fund the account initially it's at the prevailing exchange rate that day. I don't expect to have to use the exchange rate for each day I buy/sell a CFD when showing my CGT calculations, since I'm not actually exchanging any currency... I'm simply buying and selling in the currency I had already converted when I initially funded the account, which was GBP to USD. So no conversion is taking place when I buy/sell the CFD.

Get me?

If I'm reading this right, HMRC want me to use the exchange rate at the time I buy and sell the asset, even though I bought the asset in USD using USD as I had already converted it. That makes no sense to me.

By the way I don't even trade Forex... I trade indices. ;-)

londoninvestor

love2learn wrote: »

... with regards to the exchange rates to use on both the purchase and disposal values... I notice HMRC lists the average monthly exchange rates. So if I place say 100 trades during a month, do I simply use the average rate for that month? Or is there somewhere else to obtain the exact exchange rate for each individual day and time that I need to use?

That probably is defensible as HMRC publish those rates.

Personally I use the daily rates published by the Bank of England. While the BoE explicitly states these are not more "official" than any other bank's view of the market, I don't expect HMRC to quibble with them. The useful thing is you can easily download a CSV with a table of daily rates over the period, so it becomes an easy VLOOKUP to bring the rate into your spreadsheet.

(Example for USD/GBP.)

love2learn wrote: »

For the tax to be fair, I think it should be a case of saying I made X amount of USD during the tax year. When I convert that gain back to sterling by withdrawing the amount to my account... I get X amount of GBP and that then becomes the realised gain, and should be taxed accordingly.

I can't speak for the government or HMRC or judges - but the way I make sense of the rules is that the gain is realised once you exit the position (i.e. sell the stock or close the CFD). Because at that point, you have money that's spendable - whether or not you convert it. (Now, that might not be the case if you ended up with some restricted currency like Malaysian ringgits - the CGT rules do recognise and make provision for that.)

After all, you could just spend your USD proceeds without ever converting into GBP - and it would be problematic if that then meant that you never were considered to have realised a gain!

I'm a real-life example of this actually - I sold some shares for USD earlier in the year, kept a chunk of the proceeds in USD, and spent them in USD on my holiday in the US. As I never converted them back into GBP, measuring CGT based on "amount of GBP actually received" would have been nice for me but not measured my economic gain.

antrobus

love2learn wrote: »

That's not what I mean mate. I don't mean the amount I may lose or gain when I withdraw money from the account. I know I can win or lose when I take money out of the account.....

Mmm. Well. So what did you mean when you wrote;

When I convert that gain back to sterling by withdrawing the amount to my account... I get X amount of GBP and that then becomes the realised gain, and should be taxed accordingly.

love2learn wrote: »

I mean when I fund the account initially it's at the prevailing exchange rate that day. I don't expect to have to use the exchange rate for each day I buy/sell a CFD when showing my CGT calculations, since I'm not actually exchanging any currency... I'm simply buying and selling in the currency I had already converted when I initially funded the account, which was GBP to USD. So no conversion is taking place when I buy/sell the CFD.

Get me?

If you make a capital gain (or loss) of USD on a certain date, then for UK CGT purposes that needs to be converted into GBP.

love2learn wrote: »

If I'm reading this right, HMRC want me to use the exchange rate at the time I buy and sell the asset, even though I bought the asset in USD using USD as I had already converted it. That makes no sense to me....

I don't understand your problem. If you make a capital gain of USD 120,000 on the 20th September, and the applicable exchange rate is 1.20, you have made a gain of GBP 100,000 on which you are taxed.

Fretting about what cable was when you bought that initial pot of dollars, or what it will be in the future is neither here nor there.

love2learn wrote: »

By the way I don't even trade Forex... I trade indices. ;-)

Ah, I see so you're not that smart when it comes to forex.:)

AnotherJoe

I think the OPs point which is an intriguing one, is if you bought dollars at 1.40 and then traded a month later using those dollars, do you use the 1.40 price or the 1.30 "on the day" price.


I've always used the on the day price but i would only do a handful of such trades in a year so its no hassle to calculate it. But i can see it would be defensible to use the original 1.40 price "method 1", however I've no idea if thats allowed.



I also to date have stayed under the CGT limits so it shouldn't be an issue, though potentially i do have some bigger chunks i might wish to liquidate and bring back here where there would be CGT. It would be impossible to work out what the pound/dollar rate was when i bought them using "method 1" because there are too many intermingled intermediate trades and also money in and out. Which i guess speaks for, keeping it simple use the value on the day you bought and sold and if you are day trading keep very very good records.