Calculating tax on gains help

Bruckner

Can anyone please confirm if this is the correct way gains on the same share are calculated year to year? Year 3 has me unsure which way to calculate the cost price of shares sold, but if year 1 or 2 is wrong then it's all wrong!
Thanks in advance.
Here goes: 

Assuming taxable income on gains.
Year 1
In year 1 you buy 100 shares in X PLC for £1.00 and then sell 50 shares for £1.20.
Taxable gain year 1 = 50 x 20p = £10.00.

Year 2
Starts with 50 shares (originally purchased at £1.00) and buy 50 more for £1.50. You later sell 20 shares for £1.80. 
Calculation for the gains in each year:
Shares cost (old 50 x £1.00 = £50.00) + (new 50 x £1.50 = £75.00) total cost £125.00
Shares held at time of sale 100 old and new
Average share price paid for shares held at time of sale = £125 / 100 = £1.25
Shares sold = 20 @ £1.80
Taxable gain year 2 = 20 x 30p = £6.00

Year 3
Starts with 80 old shares (purchased at an average of £1.25). You sell all 80 for £1.35
You then buy 100 more for £1.50.
You then sell 50 shares for £1.70.
How is the gain calculated in year 3?
Is it:
a) 80 x (£1.35 - £1.25 = 10p) = £8.00 + 50 x (£1.70 - £1.50 = 20p) = £10.00
Total gains £18.00
or
b) 80 shares average price paid £1.25 = £100 + 100 shares price paid £1.50 = £150
Total 180 shares total price paid £250 = average price paid £1.39
Shares sold 80 x (£1.35 - £1.39) = -£3.20 loss + 50 x (£1.70 - £1.39) = £15.50
Total gains £12.30

The difference is that in a) there is a reset/cut-off for the average price paid because at some point in the year no shares were any longer held, with b) the average price paid for all shares ever held continues to be pooled into the average indefinitely. Which is correct? Or neither?

eskbanker

Bruckner said:

Year 2
Starts with 50 shares (originally purchased at £1.00) and buy 50 more for £1.50. You later sell 20 shares for £1.80. 
Calculation for the gains in each year:
Shares cost (old 50 x £1.00 = £50.00) + (new 50 x £1.50 = £75.00) total cost £125.00
Shares held at time of sale 100 old and new
Average share price paid for shares held at time of sale = £125 / 100 = £1.25
Shares sold = 20 @ £1.80
Taxable gain year 2 = 20 x 30p = £6.00

If you sell at £1.80 and the average price paid was £1.25 then your gain is 55p per share, so a taxable gain of £11.

Bruckner said:

Year 3
Starts with 80 old shares (purchased at an average of £1.25). You sell all 80 for £1.35
You then buy 100 more for £1.50.
You then sell 50 shares for £1.70.
How is the gain calculated in year 3?
Is it:
a) 80 x (£1.35 - £1.25 = 10p) = £8.00 + 50 x (£1.70 - £1.50 = 20p) = £10.00
Total gains £18.00

Yes.

Bruckner

Thank you eskbanker. 

So you keep "pooling" the average buy price of all shares held and use that average when selling from that pool.

But if at any point the pool is exhausted and you hold no shares, then if you buy any more shares after that, a new "pool" average is started?

This process continues indefinitely.
Is this a correct summary?

eskbanker

That's certainly my understanding, yes....

port_of_spain

I agree with eskbanker's reply, and OP's summary, but with one caveat. At various times, there is a purchase following a sale, at an unspecified "later" date. That is no problem, so long as the purchase is at least 31 days later than the most recent sale. But if it is 30 days or less later, then it is all rather different, because you have to bring in the "30 day rule", which is an exception to the "pooling" method. (This can also apply when the purchase is in a later tax year than the previous sale.)

Bruckner

Thank you.

wmb194

There’s another exception if you buy and sell the same shares on the same day.