Capital Gains Across Borders: Why Getting This Wrong Costs Real Money

The UK approach: Section 104 and share pooling

The UK uses a share pooling approach. When you buy shares in the same company across multiple transactions, the shares are pooled together — the pool has a total number of shares and a total acquisition cost, and disposals draw down at the average cost per share.

Important wrinkles:

• The same-day rule: If you buy and sell the same security on the same day, the sale is matched against the same-day purchase first, not the pool.
• The 30-day rule (bed and breakfasting): If you sell shares and buy the same shares back within 30 days, the sale is matched against the subsequent purchase rather than the pool — preventing artificial loss crystallisation.
• Section 104 pool: Everything not matched under the above rules goes into the pool.

Getting this right manually — particularly if you've traded the same security over several years — is genuinely difficult. The order in which matching rules are applied matters, and the pool cost needs to be updated correctly after each event.

The US approach: lot identification and wash sales

The US gives investors more flexibility but also more complexity. When you sell shares, you can specify which lot you're selling from — enabling FIFO, LIFO, highest-cost-first, or specific identification. The choice affects your gain and whether it's short-term (ordinary income rates) or long-term (preferential rates for holdings over 12 months).

For partnership interests and pass-through vehicles — PE funds, real estate partnerships, venture funds — the IRC §704(c) rules govern how pre-contribution gains are allocated, how cost basis adjusts through contributions and distributions, and how gains are tracked when partners enter at different valuations.

Wash sale rules: If you sell a security at a loss and buy the same security within 30 days before or after, the loss is disallowed and added to the cost basis of the replacement. This applies across all accounts including IRAs.

FX and capital gains

For investors in one jurisdiction who hold assets denominated in another currency, the currency conversion itself creates a taxable event in most cases.

In the UK, HMRC treats foreign currency assets as assets in their own right. If you buy USD-denominated shares and USD strengthens against GBP by the time you sell, part of your gain is attributable to the exchange rate movement — and it's taxable.

This requires knowing the GBP equivalent at the purchase date and the sale date. A portfolio tracker that uses current exchange rates for historical cost basis will compute incorrect capital gains for any foreign-currency holding.

Cost basis after corporate actions

Stock splits, bonus issues, rights issues, mergers, spin-offs — all require cost basis adjustments. Each jurisdiction has specific rules. In the UK, a bonus issue doesn't change the total cost — it just increases the number of shares. A rights issue involves new consideration and creates a new acquisition. In the US, a spin-off requires allocating the original cost basis between parent and spun-off entity based on relative fair market values at the time.

Miss one corporate action and every subsequent calculation for that holding is wrong.

What good records protect you from

If you're ever audited, the question is: can you reconstruct the cost basis for every disposal? Good records mean:

• Every acquisition with date, price, units, and exchange rate
• Every disposal matched against specific acquisitions using applicable rules
• Every corporate action recorded with the effect on cost basis
• An audit trail linking disposals to original acquisition records

Tax season shouldn't be the first time you find out whether your records are correct.