How is CGT charged on the currency exchange portion of a stock trade?

[Derek Maloney]

Hi,

If an Irish based invested converts a sum of money in their trading account into dollars how does this affect the transactions of dollar denominated stocks - with respect to the fluctuations in the Euro/Dollar rate over time? Here's an example, where I've included my guess at how it should treated in italics within square brackets...

1. Take 3,000 euro and convert into 4,251 dollars (at a 1:1.09 US-EUR rate). [To me this would suggest an amount liable for FX-related CGT of 4,251 dollars at some point(s) in time].
2. Buy 1000 dollars of a US stock such as SPY (now have 2000 dollars of cash left). The US-EUR rate on the day is 1:1.07 on the day. Does a FX-related capital gain of roughly 2 cents on the dollar need to be declared in the tax return? Or maybe it doesn't have to be as the US stock is still a dollar denominated asset? ie. there was no FX conversion even - though there is an asset conversion. [So I don't think an FX-related CGT tax return needs to be performed. To me this would suggest an amount liable for FX-related CGT of 4,251 dollars at some point(s) in time - but not today].
3. The US stock increases in price to 1500 dollars and you sell it (on the day the US-EUR rate is 1:1.04).
   • You then have made a gain of 500 dollars on the US based stock - so you must pay tax on 500 dollars converted into euro, that will be 500 / 1.04 = ~481 euro.
   • This 500 dollar gain should never be liable to FX related CGT as you have already paid the gain on it. [To me this would suggest an amount liable for FX-related CGT of 4,251 dollars at some point(s) in time - but again not today].
4. The following year 2000 dollars is converted back into Euro (at a 1:1.03 US-EUR rate). [To me this would suggest an amount liable for FX-related CGT of 2000 dollars - with 6 cents on the dollar on the day needing to be paid. ie (1.09 -1.03 = 6 European cents). So that is 120 euro of FX related CGT to be paid in the tax return].
5. Yet another year later 2,251 dollars is converted back into Euro (at a 1:1.01 US-EUR rate). [To me this would suggest an amount liable for FX-related CGT of 2,251 dollars - with 8 cents on the dollar on the day needing to be paid. ie (1.09 -1.01 = 8 European cents). So that is ~180 euro of FX related CGT to be paid in the tax return].
   
6. This leaves 500 dollars in the account. [This can be withdrawn at any time without paying FX related CGT as it came from the gain on the stock itself].

However, I have a feeling that perhaps some FX-related CGT needs to be paid in points 2,3,4 and 5 above? This seems messy and unnecessary to me - does anyone know?

P.S. I've read http://www.askaboutmoney.com/threads/interesting-capital-gains-tax-question.174903/ but it doesn't really cover my question as the poster bought gold using sterling and hence passed through an "FX boundary" as I presume the gold was priced in dollars.

 

[Branz]

I think you are over complicating it
have you read this and looked at the examples
[broken link removed]gains-tax.../19-01-14a.pdf

 

[dub_nerd]

If an Irish based invested converts a sum of money in their trading account into dollars how does this affect the transactions of dollar denominated stocks - with respect to the fluctuations in the Euro/Dollar rate over time? Here's an example, where I've included my guess at how it should treated in italics within square brackets...

To me your calculations look broadly right with one exception. I am going on my reading of Revenue guidelines, not on any qualification or expertise in this area. The mains ones would be [broken link removed] and [broken link removed] (note: links to Revenue website searches as Revenue documents have a habit of moving).

The first point is that CGT liability on foreign currency share trades is based on exchange rate on date of acquisition and disposal of the shares. So your italicised guesses on examples 2 and 3 conform to this, i.e CGT on shares arises when you sell the shares and is based on euro-equivalent price on dates of acquisition and sale (of the shares, not the dollars).

Regarding currency trades, the second document applies: "a chargeable gain/allowable loss can arise to a person buying and selling foreign currency otherwise than in the course of trade. That gain/loss is computed by reference to the corresponding euro value of the purchase price and the sale proceeds". Your italics on 1,4, and 5 look to be in accordance with this, i.e. capital gain or loss occurs when you convert back to euros, based on difference from original purchase price of dollars.

The one that looks wrong (though I am unsure) is your example 6. The 500 USD was effectively bought with euros on the date of the sale of the shares. After all, that's the amount you declared tax on. So arguably a capital gain or loss occurs when you convert the 500 USD to euros, based on the difference from the exchange rate from date of sale of shares. On the other hand, that Revenue note specifically refers to "buying and selling foreign currency otherwise than in the course of trade". If the 500 USD is considered to arise in the course of trade, then it does not apply. I've no idea if this is the case or, if it isn't, what other rules apply. My gut feel is that "trade" refers to the trade of goods and services and not shares, so CGT does apply as I suggested.

If it was me, and I was looking at, say, a ten cent movement in the exchange rate, so the amount of tax involved was very roughly on the order of 500 * 0.1 * exch_rate * 33% =~ €15, I'd completely ignore it on the basis that life is too short to be that scrupulous. If it was one or two orders of magnitude more, I'd ask Revenue or pay for advice.

 

[Derek Maloney]

Belated thanks Brandz and dub_nerd. In particular, thanks for your second opinion on my list of points. And I agree that point 6 seems to be the most contentious point, and dub_nerd, your interpretation is interesting. I will do more research in this area.