eToro Trading - USD TO GBP (CGT)

00ec25

AnotherJoe wrote: »

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.

you can make it simple or complex depending on your outlook on life
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78300

tracking one by one is certainly seen as simple by many (incl HMRC)
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78310

but others may like complexity(?) and may opt for asset pools
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78316

londoninvestor

AnotherJoe wrote: »

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 don't think it would be because: (link)

HMRC wrote:

For example, if US shares are bought for US dollars in a bargain at arm’s length for full consideration

the acquisition cost of the shares is the sterling equivalent of the dollars given at the exchange rate in force at the date of acquisition of the shares;

londoninvestor

00ec25 wrote: »

tracking one by one is certainly seen as simple by many (incl HMRC)
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78310

but others may like complexity(?) and may opt for asset pools
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78316

00ec25, I'm a bit puzzled by some things in the manual, like the second link there. They talk about gains and losses relating to disposals of currency (rather than of shares denominated in that currency). Are they left over from the pre-2012 rules, where gains and losses on your balances of foreign currencies themselves were taxable?

londoninvestor

antrobus wrote: »

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.

It's not quite like this - the exchange rate at the point of acquisition matters too. The GBP gain is the proceeds (converted to GBP at date of sale) minus the acquisition costs (converted to GBP at date of purchase).

Let's say we:
a) buy $130,000 of a share when the FX rate is 1.30
b) sell that entire holding for $225,000 when the FX rate is 1.50

Then the gain in USD terms is $95,000. But the taxable GBP gain isn't £63,333 (i.e. 95,000 / 1.5).

It's (225,000 / 1.5) - (130,000 / 1.3)
= £150,000 - £100,000
= £50,000

00ec25

londoninvestor wrote: »

00ec25, I'm a bit puzzled by some things in the manual, like the second link there. They talk about gains and losses relating to disposals of currency (rather than of shares denominated in that currency). Are they left over from the pre-2012 rules, where gains and losses on your balances of foreign currencies themselves were taxable?

possibly/probably.

the pages I quoted could be those that relate to the pre 2012 rules. Not my area and i didn't spent long on reading the manual so could have skipped a page that explained the following pages related only to old rules

feel free to qualify further as required.

londoninvestor

00ec25 wrote: »

possibly/probably.

the pages I quoted could be those that relate to the pre 2012 rules. Not my area and i didn't spent long on reading the manual so could have skipped a page that explained the following pages related only to old rules

feel free to qualify further as required.

Thanks, no problem - was just wondering if you knew any more background than I do!

love2learn

So basically I'm best creating a spread sheet for each trade, having the following...

1. Asset traded
2. Trade type (Long/Short)
3. Open Date
4. Close Date
5. Open Price USD
6. Close Price USD
7. Open Exchange rate
8. Close Exchange Rate
9. Calculation
10. Profit/Loss

If at the end of every day I enter this information, then I have full records. Would HMRC accept a spread sheet being uploaded to my self assessment at the end of the tax year to show all my workings? Then I could simply declare my Gain and pay the tax?

love2learn

The thing I still don't get is... say for example at the end of the tax year I need to pay X amount to HMRC... I obvioulsy need to withdraw the money to pay them from the USD account... if the GBP has risen dramatically from when I made the original capital gains months before I withdraw the money... then I get hit on the exchange rate when I need to withdraw and convert back to GBP.

Surely HMRC will take this into account too? If not then they're not playing fair. I'll be phoning them tomorrow about it anyway, I spoke to their CGT team yesterday, but they said it need referred to an inspector as it's more complicated and to call back on Monday.

I'll discuss it in detail then.

love2learn

londoninvestor wrote: »

It's not quite like this - the exchange rate at the point of acquisition matters too. The GBP gain is the proceeds (converted to GBP at date of sale) minus the acquisition costs (converted to GBP at date of purchase).

Let's say we:
a) buy $130,000 of a share when the FX rate is 1.30
b) sell that entire holding for $225,000 when the FX rate is 1.50

Then the gain in USD terms is $95,000. But the taxable GBP gain isn't £63,333 (i.e. 95,000 / 1.5).

It's (225,000 / 1.5) - (130,000 / 1.3)
= £150,000 - £100,000
= £50,000

In this example, whilst I know you're calculation is right. Doesn't that mean HMRC would be getting less tax than they are actually owed? Because that actual amount of profit in GBP was £63,333 when converting the $95,000 gain at the point of sale to GBP. But when using the calculation, the gain is £50,000 so there's £13,333 not being reported because the exchange rate is being used when buying and selling... and there's a big difference in the two rates.

So £13,333 is not being assessed for CGT and HMRC are technically being underpaid.

This is what I mean, when I trade through eToro there's literally no exchange of currency taking placed as I buy in USD and sell in USD. The exchange already happened when I funded the account. The hundreds of trades after that point, no exchange happens.

If HMRC wanted to make sure they were getting exactly what they are owed, then the gain should not be classed as realised until the end of the tax year. So I would then simply say I made X amount of USD (and evidence it) after all trades are considered. If I then withdraw that amount to my UK bank account the proceeds are X after the conversion so I made X amount of money that year... please tax me accordingly.

Then HMRC are not being underpaid, nor are they being overpaid... they are just getting what they are actually owed. It seems the part that's wrong is working out exchanges of currency that didn't even take place, and therefore sometimes under reporting the profits.

I would just want to pay what I owe, and HMRC make it stupidly hard and also appear to lower their own tax take by doing do.

I try to discuss this in detail tomorrow with one of their guys on the phone with specialist knowledge... they call them inspectors.

londoninvestor

love2learn wrote: »

If at the end of every day I enter this information, then I have full records. Would HMRC accept a spread sheet being uploaded to my self assessment at the end of the tax year to show all my workings? Then I could simply declare my Gain and pay the tax?

I'd think that's fine. HMRC do have a suggested "capital gains worksheet" but using it isn't obligatory, and it doesn't work well for anything but the simplest cases.

For myself, I also take the spreadsheet approach. I don't do much in foreign currency, but I do have various fund holdings that have been built up through many individual purchases, so the CGT calculation requires going through the section 104 methodology. I reckon it's much easier both for me to show the calculation, and the tax inspector to understand it, using a well labelled spreadsheet. HMRC have never had a problem with this.

Although, you can't upload an actual Excel file - you need to convert it to a PDF. Not hard, but it seems a bit of a limitation for HMRC that they can't check my formulas!

love2learn wrote: »

The thing I still don't get is... say for example at the end of the tax year I need to pay X amount to HMRC... I obvioulsy need to withdraw the money to pay them from the USD account... if the GBP has risen dramatically from when I made the original capital gains months before I withdraw the money... then I get hit on the exchange rate when I need to withdraw and convert back to GBP.

Surely HMRC will take this into account too?

In my understanding, HMRC will only make a provision for not exchanging the currency straight away when it's a restricted currency, i.e. there are capital controls around it, so you had no possibility of exchanging it.

The principle is that for a freely-traded currency like USD, you do have the choice of converting it straight back to GBP as soon as you receive it. If you choose to hold onto it - or indeed to spend it directly without ever converting it, like I did with some of my USD - that's your free choice but it doesn't affect your tax liability.

love2learn wrote: »

In this example, whilst I know you're calculation is right. Doesn't that mean HMRC would be getting less tax than they are actually owed?

What they're actually owed according to the law - as backed up by court precedents in Bentley v Pike and Capcount v Evans - is the CGT due on £50,000. (But I know you know that.)

The methodology of "measure the gain in foreign currency and convert that all to GBP using the exchange rate at the time of sale" would result in more tax being paid when the pound is rising, less tax being paid when it's falling. I suspect it might average out about the same for the government in the long run, but there you go!