Capital gain tax for foreign currency on (non-tax-sheltered) brokerage account

itwasntme001

masonic said:

itwasntme001 said:

Then I am even more confused because I thought we were only talking about gains/losses when converting back already converted currency?  So GBP to USD and then later USD to GBP, with the net gain or loss.

Now you are saying for just one conversion I need to look at whether it was favourable to me or not vs. spot rate, which it definately is not.

So there are two ways that CGT might be applicable for FX?

When you transfer your foreign currency out of a foreign currency bank account into something that is not a foreign currency bank account then any subsequent gain or loss is not subject to the exemption, so you have to consider the gain made when your money was in the foreign currency bank account (this is exempted) and the gain you made while it was outside of the foreign currency bank account (this is not exempted).

It is a similar situation to the one proposed by wmb194 above where the money is invested in a MMF and therefore subject to normal investment CGT calculations. Though this scenario is clearer.

Unless the FX moves materially in your favour while the external FX service has it, then it would be unlikely that there would be a non-trivial gain.

Ok I think I understand better now.

So for the GBP I converted using TW, who held it in a e-money account for a day or so, this would be taxable if the FX rate moves in my favour up until the USD is moved from TW to a foreign bank account (e.g. with ii)?  The tax year for which this is applicable would be the tax year I moved the USD to the foreign bank account?

While this money is in ii, presumbly held in a foreign bank account, there would be an exemption for CGT on FX, even though I converted some back to GBP within ii, and some GBP to USD within ii also.

Of course there will be some CGT impact from FX when buying and selling USD denominated equities.

And when ever I convert the USD back to GBP by transfering from ii to TW, since it is just back to GBP there is therefore no FX CGT obviously?

masonic

itwasntme001 said:

So for the GBP I converted using TW, who held it in a e-money account for a day or so, this would be taxable if the FX rate moves in my favour up until the USD is moved from TW to a foreign bank account (e.g. with ii)?  The tax year for which this is applicable would be the tax year I moved the USD to the foreign bank account?

While this money is in ii, presumbly held in a foreign bank account, there would be an exemption for CGT on FX, even though I converted some back to GBP within ii, and some GBP to USD within ii also.

Of course there will be some CGT impact from FX when buying and selling USD denominated equities.

Correct

itwasntme001 said:

And when ever I convert the USD back to GBP by transfering from ii to TW, since it is just back to GBP there is therefore no FX CGT obviously?

There will also be a possible liability here, because you are moving USD from an exempt account to a non-exempt account and the FX could move between then and when your conversion happens.

itwasntme001

Yes thats true, so there can potentially be a liaibltiy when moving back to TW.

Checking my TW transaction history, I have made lots of small transfers for paying for holidays abroad.  Few thousand each time.  I guess these would be potentially CGT liable.

The funny thing is though I have always used the HMRC monthly FX rates published on their site in order to calculate gains/losses on USD equities when I have sold.  If I apply the same method of using the HMRC monthly FX rate, there would be no liability if the monies was sent (or received) all within the same month.

Makes things nice and simple!

masonic

itwasntme001 said:

Checking my TW transaction history, I have made lots of small transfers for paying for holidays abroad.  Few thousand each time.  I guess there would be potentially CGT liable.

There is another exception for money obtained for personal expenditure of individuals while abroad.

itwasntme001 said:

The funny thing is though I have always used the HMRC monthly FX rates published on their site in order to calculate gains/losses on USD equities when I have sold.  If I apply the same method of using the HMRC monthly FX rate, there would be no liability if the monies was sent (or received) all within the same month.

Makes things nice and simple!

It is possible that this is valid in your scenario. However, if one were engaged in currency speculation one may only hold positions intra-month, and HMRC would surely not be satisfied with such an approach. As such, it is a bit of a grey area.

But I think it is unlikely you'd make a material gain if you are converting to GBP promptly upon receipt into TransferWise and transferring out promptly after converting to USD.

itwasntme001

Yes I just saw about the exemption for FX when using for holidays.  Presumably this includes paying for hotels directly in a foreign country using foreign currency and also transferring foreign currency from TW to a personal or family member's foreign bank account for use abroad?

I guess I need to just confirm with ii that the foreign currency that they hold on my behalf is only in an actual foreign bank account.  If true, this means anything within ii relating to FX (except when selling foreign equities) would be CGT exempt.

masonic

itwasntme001 said:

Yes I just saw about the exemption for FX when using for holidays.  Presumably this includes paying for hotels directly in a foreign country using foreign currency and also transferring foreign currency from TW to a personal or family member's foreign bank account for use abroad?

The rules are not that detailed, but both of those examples would seem to be in the spirit of the rules.

itwasntme001

masonic said:

itwasntme001 said:

Yes I just saw about the exemption for FX when using for holidays.  Presumably this includes paying for hotels directly in a foreign country using foreign currency and also transferring foreign currency from TW to a personal or family member's foreign bank account for use abroad?

The rules are not that detailed, but both of those examples would seem to be in the spirit of the rules.

I checked with ii and they do hold the USD cash in a bank account.  So confirms the exemption on the ii side.

Makes things a lot easier and glad I have been doing these calculations correctly.

Thanks for your help masonic.

stuart_b

masonic commented earlier that an e-money account is not a foreign currency bank account and therefore the CGT exemption does not apply. They went on to say that the question to ask is whether Wise is within the FSCS.

I've been trying to understand this also (and coincidentally for Wise also).

I believe the relevant legislation is in sections 251 and 252 of The Taxation of Chargeable Gains Act 1992 (and as since amended).

251 (1) says that simple debts do not accrue chargeable capital gains. When you just hold money in an account, the bank (or other financial institution) owes you a simple debt.

So - no capital gains tax on that.

252 puts foreign currency debts back inside the scope of capital gains tax. A "foreign currency debt" is defined as a debt owed by a "bank" in a currency other than sterling. The non-sterling bit is kind of obvious, but it explicitly says owed by a "bank".

252 only applies to creditors (i.e. customers of the "bank") who are "individuals".

[it covers other possibilities omitted here for clarity]

I'm assuming now that this thread is about individuals holding foreign currency and the key question then becomes "is your foreign currency in a 'bank' ?"

I could not find a definition of "bank" in the relevant Act.

Wise say:

"Wise Payments Ltd is not a bank, which means we do not lend out our customers’ money to people or businesses. This also means the e-money and payment services provided to you by Wise Payments Ltd are not subject to the Financial Services Compensation Scheme (FSCS)."

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I think there are two ways to look at all of this, but I believe they lead to the same conclusion. I think it means that Wise (and similar) foreign currency gains/losses are outside of scope for CGT.

Two ways….

1. Taking the law as written, Wise say they are not a "bank" and therefore section 252 does not apply, or
2. There is no definition of bank and in practice the law would therefore be interpreted as applying to any institutions which walk and talk like banks (i.e. including Wise).

If you believe 1. then we just go back to section 252 (1) and gains on simple debts are not chargeable to capital gains.

I cannot say for certain that holding foreign currency with Wise represents being the creditor of a simple debt (with Wise being the debtor), but I firmly believe that it does (after research) and therefore money at Wise is not in scope for capital gains.

If you believe 2. then holding foreign currency as an individual with Wise is covered by section 252 and again, gains are not in the scope of CGT.

It's already been covered in this thread, but it's worth reiterating that, anything else, like their interest or stocks options which are actually buying shares in an ETF are within the scope of CGT.

masonic

That's an interesting analysis. It hinges on the e-money being issued by Wise not being considered a "security", since a simple debt is one not deemed to be debt on security. Clearly a money market fund is a security and that is why FX gains arising from these would not be exempted.

What constitutes a security for the purposes of defining a simple debt is the subject of case law and not something I have delved into in detail. It is clear that when you are earning interest on your deposits at Wise then you have a debt on security and not a simple debt. It is less clear what is going on behind the scenes in the simple case. But it seems as though the e-money lacks some of the expected features of debt on security, such as the ability to realise it at a profit (since exchange gains or losses should not be taken into account in deciding whether a debt is a debt on security - https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg53433 ).

So that does move me closer to the exemption side, assuming I am not missing anything in the nature of the e-money.

stuart_b

Yes, this final point about whether or not holding money in an e-money account constitutes a simple debt is the clincher.

Again, leaving aside the interest and stock arrangements Wise offers, which are taxable.

I don't have a definitive answer on the simple debt question for normal currency holdings, but my thought process was that there are two possible scenarios:

1. Either there is a simple debt or
2. Customers have an absolute interest in some ring-fenced assets (which might include a debt on a security).

Consider the situation if Wise were to go into administration. Do we think that all Wise customers have allocated ring-fenced assets, or do we believe that customers would be creditors seeking to recover the debt that Wise owes them?

I went through the customer agreement, and surprisingly or unsurprisingly, depending on your perspective, this is not clear.

The customer agreement leans towards marketing language rather than being very clear about such a crucial point.

The closest it gets to clarity is "The funds held on your Wise Account belong to you as the registered Wise Account holder". Which makes it sound less like a debt arrangement, but I don't think it is sufficiently clear to change my conclusion.

Wise actually stashes money away with banks, and in money market funds, bonds, etc., to fulfil its safeguarding obligations.

To your point about Debt on Security. There is also the HMRC manual https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg53420

Which, perhaps unsurprisingly, goes on to explain that there is no definition of a debt on security :-)

In the case of Wise, we would need to believe that individual customers held some ownership (technically, beneficial interest) in a particular "security". Security here would mean shares, bonds, etc., which Wise Payments Ltd issued when a customer deposits money or perhaps the underlying safeguarded assets which Wise holds.

I believe it is vanishingly unlikely that Electronic Money and Payment Institutions (EMIs) will have been set up in a way which guarantees the return of customer funds in all scenarios through a debt on securities, since even banks do not operate this way (call me an old cynic).

I briefly looked at the FCA's guidance on EMIs to see if it says anything about this. The following sheds some light….

https://www.fca.org.uk/news/press-releases/payment-safeguarding-rules-changes

In May of this year, there will be tighter rules for how customer money will need to be held separately and to better ensure that sufficient money is safeguarded. It highlights that:

"Payment firms that became insolvent between Q1 2018 and Q2 2023 had average shortfalls of 65% of their customers’ funds."

This seems to clearly point to a simple debt arrangement for EMIs in general.

It's perhaps adding as context that confirmation bias might play a role when trying to see if something is exempt from tax :-). My immediate interest, however, was actually trying to confirm that this situation WOULD BE chargeable to tax as I have a loss I could usefully recognise.