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Using USA share identification rules

Has anyone agreed this with HMRC?

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I have a client with around £200k of US stocks which he actively trades, to the point his trades are about £200k per annum, often the same stocks bought/sold, with about 50 stocks, and 100 trades per annum.

I am happy this is not a "trade" but is an "investment" activity for tax purposes.

Whilst I can deal with the FX issues, for share identifcation the only reports I can get are US rules, which would mean a mamoth task to do it properly and work out the right share pools from transaction level reporting, especially as many dividends are reinvested so there are a lot of micro purchases going on.

Whilst its clearly "wrong" to use the wrong share identification methods, if we consistently use US rules does anyone think HMRC will give a stuff?  I know HMRC can agree to non-conventional methodologies.    On a practical level if a tax investigation arose we could send them all the US reports and ask them to work it out their way.............good luck with that.  I doubt the tax would be much off over a 3-5 years period as it should even itself out. 

Am pondering and would appreciate any thoughts.

Replies (6)

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Caroline
By accountantccole
12th Sep 2019 11:46

White space disclosure re assumptions used or write and tell them if you are particularly worried

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By Accountant A
12th Sep 2019 20:37

Do you mean 100 trades in total or 100 trades in 50 stocks = 5,000 trades?

Either way, can you "white space" to say that you have completely ignored what the legislation says about matching?

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Replying to Accountant A:
By ireallyshouldknowthisbut
13th Sep 2019 15:36

100 purchases/sales per annum.

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By WhichTyler
12th Sep 2019 23:14

ireallyshouldknowthisbut wrote:

I have a client with around £200k of US stocks which he actively trades, to the point his trades are about £200k per annum, often the same stocks bought/sold, with about 50 stocks, and 100 trades per annum.

I am happy this is not a "trade" but is an "investment" activity for tax purposes.

Can we ask why it isn't a trade, given that you keep calling it one?

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Replying to WhichTyler:
By ireallyshouldknowthisbut
13th Sep 2019 15:35

Its not a trade from a tax point of view, its definitely an investment.

But people who buy and sell shares in this manner call it "trading"

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By David Treitel
13th Sep 2019 07:39

From a UK perspective, where shares are purchased on different dates, UK law requires in most circumstances that the cost of the shares sold are identified by calculating the purchase price using an average cost method. This is technically known as a “Section 104 share pool”.
1. UK case law requires that one uses spot daily historic exchange rates for every purchase and sale. For an investment portfolio that has existed for a long time or has had frequent transactions, these can be difficult to establish or time consuming to calculate.
2. For an investment portfolio that has existed for a long time or has had frequent transactions, it can equally be difficult to establish or time consuming to calculate the Section 104 share pool, as this would require identifying every purchase and sale transaction for each security held, right back to the very first purchase.
3. A US brokerage house will provide data about the cost basis on Form 1099s each year. Where US stock or mutual funds have been acquired on more than one date, the cost basis reported for US purposes will typically either use a US average cost (for domestic US mutual funds) or a FIFO (First In First Out) method (for direct stock) to identify the shares sold. Other less popular methods of identifying the cost of stock sold are also occasionally seen on Forms 1099. All US domestic reporting will be calculated in US dollars and will not take account of changes in the pound dollar exchange rate. Consequently, where US stock or mutual funds have been acquired on more than one date, none of the cost basis provided by a US investment manager will technically be acceptable for UK purposes.
4. A gain on a holding of a US domestic mutual fund or ETF that does not have HMRC reporting status will give rise to an OIG (Offshore Income Gain). Offshore funds that are sold which give rise to OIGs are considered to be “relevant securities” and therefore fall outside of the Section 104 share pooling rules.

The number of trades described in this question is not, however, substantial. Excel VLOOKUP will help with exchange rates. It may be helpful to educate the client that some of any gain will need to be spent on larger than normal UK accounting fees.

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