When a US citizen living in Britain sells shares held outside an ISA, both countries tax the gain, but they measure it differently. The UK matches the sale against a pooled average cost in pounds under its share identification rules (opens the official GOV.UK page in a new tab). The US looks at the particular lot sold, in dollars, under the rules in Publication 550 (opens the official IRS page in a new tab). The two gains, and even the holding period, can differ.
This post is for Americans in the UK with a general investment account at a UK broker who want to understand why their two returns never show the same number. It goes deeper on one question than our guide to avoiding US-UK double taxation. We cover the UK matching order, US lot identification, exchange rates, how the UK tax is credited, a worked example, the forms, and the ISA and fund traps.
How does the UK work out the cost of shares you sell?
The UK matches shares sold against shares bought in a fixed order. First come shares of the same company bought on the same day. Next come shares bought back within a short window after the sale, the bed and breakfasting rule. Anything left is matched against the Section 104 holding, a single pool carried at average cost.
HMRC's helpsheet HS284 explains that all shares of the same class in the same company form one Section 104 holding, and each share in it is treated as costing the same average amount. When you sell part of the holding, the allowable cost is the proportion of the pool that the shares sold represent. Each purchase adds shares and cost to the pool, and each sale takes them out.
The bed and breakfasting rule applies only to shares bought while you were UK resident, so it matters mostly to people already living here. Its purpose is to stop someone selling at a gain or loss and buying straight back to crystallise a result. Gains on shares outside an ISA are charged to Capital Gains Tax (opens the official GOV.UK page in a new tab), and for UK purposes there is no distinction between shares held for a short time and a long time.
- Same-day acquisitions are matched first
- Shares bought back shortly after the sale are matched next
- The Section 104 pool is matched last, at average cost
- The pool is kept in pounds and updated on every purchase and sale
How does the US decide which shares were sold?
The US has no pool for ordinary shares. Each purchase is a separate lot with its own dollar cost and its own purchase date. If you adequately identify the lot you are selling, that lot is treated as sold. If you cannot, the shares bought first are treated as sold first. Average cost is not allowed for individual company shares.
Publication 550 sets out what adequate identification means when a broker holds the shares. You tell the broker which shares to sell at the time of the sale and receive written confirmation within a reasonable time. Many UK platforms do not offer lot selection because UK tax does not need it, so in practice the first-in, first-out rule often applies by default.
The holding period follows the lot too. It begins the day after the trade date of the purchase and ends on the trade date of the sale, and a gain is long-term only if the lot was held for more than a year. The US also has a wash sale rule that disallows a loss where substantially identical shares are bought within a window either side of the sale. It is a different rule from the UK bed and breakfasting rule and catches different trades.
Why can the gain differ between the two returns?
Three things pull the figures apart. The UK uses an average cost across every purchase while the US uses the cost of a specific lot. The UK measures in pounds while the US measures in dollars. And one return can treat a gain as short-term while the other draws no such line. Each difference is legitimate.
Currency is often the largest of the three. The IRS guidance on foreign currency and exchange rates (opens the official IRS page in a new tab) tells a taxpayer whose functional currency is the dollar to use the rate prevailing when an item is received, paid or accrued. So the purchase cost is converted at the rate on the purchase date and the sale proceeds at the rate on the sale date. A sterling loss can be a dollar gain if the pound strengthened while you held the shares.
HMRC's Capital Gains Manual takes the mirror-image view for assets bought in foreign currency, converting cost at the acquisition date, but for UK shares bought in pounds the UK computation simply stays in sterling. The result is that the UK gain and the US gain on one sale are two separate calculations, each with its own records, and neither can be derived from the other.
- Different cost: pooled average in the UK, specific or earliest lot in the US
- Different currency: pounds in the UK, dollars at each date's rate in the US
- Different holding rules: the US splits short-term and long-term, the UK does not
- Different timing: the UK tax year ends on 5 April, the US year on 31 December
How is UK capital gains tax credited on the US return?
UK Capital Gains Tax is a foreign income tax that can be credited on Form 1116 (opens the official IRS page in a new tab). The credit is limited to the US tax on the same category of foreign-source income, so the source of the gain and its category both matter. For most portfolio share sales the category is passive, but there are exceptions.
Source is the first question. Under the rules in Publication 514 (opens the official IRS page in a new tab), gain on selling personal property such as shares is generally sourced by the seller's residence. A US citizen with a tax home abroad is treated as a non-resident for this purpose only if the foreign country charges income tax of at least a minimum share of the gain. Where the UK charges little or nothing, for example because the gain falls within the annual exempt amount, the gain can be US source and there may be nothing to credit.
Category is the second. Gains on investments are usually passive category income, but passive income taxed abroad above the highest US rate that could apply to it is treated as high-taxed income and moves to the general category. Long-term gains also need the capital gain rate differential adjustment on Form 1116. Our post on general or passive UK income explains the categories, and our treaty relief service reviews the calculation.
What does a worked example look like?
Take a US citizen employed in Bristol who has bought shares in one UK listed company through a UK broker on several dates over a number of years, outside an ISA. This year she sells part of the holding. She files UK Self Assessment and a US Form 1040 (opens the official IRS page in a new tab) claiming the foreign tax credit.
On the UK side the sale is matched against her Section 104 pool, because she made no purchases on the same day or shortly afterwards. Her allowable cost is the sold proportion of the pool's average sterling cost. After the annual exempt amount of £3,000, the gain is charged at the UK rates for the year, and the tax is paid by 31 January after the UK tax year ends.
On the US side her broker could not take lot instructions, so the earliest shares are treated as sold. Their dollar cost uses the rate on each purchase date, and the proceeds use the rate on the sale date. Some of the shares sold were bought years ago, so the gain is long-term, though the dollar figure differs from the UK one. The UK tax is credited in the passive category, and the year it can be claimed depends on her method, as our post on paid or accrued credits explains.
Where are share sales reported on each return?
In the US each sale goes on Form 8949 (opens the official IRS page in a new tab), with short-term lots in Part I and long-term lots in Part II, and the totals carry to Schedule D. In the UK, disposals are reported on the capital gains pages, SA108, of the Self Assessment return, supported by the Section 104 computation.
A UK broker does not issue a US Form 1099-B, so the Form 8949 instructions direct these sales to the boxes for transactions with no 1099-B: box C for short-term and box F for long-term. Each row needs the purchase and sale dates, the dollar proceeds and the dollar cost for that lot. Keep the contract notes for every purchase, because the US calculation needs them long after the UK pool has absorbed them.
On the UK side the SA108 pages sit alongside the main SA100 return, and our UK Self Assessment service prepares both. GOV.UK also describes a real time Capital Gains Tax service that eligible people can use instead of a return. The account itself may also need to be reported on the FBAR and Form 8938, which is a separate exercise from reporting the gain.
- US: Form 8949 by lot, totals to Schedule D
- US: box C or box F where no Form 1099-B was issued
- US: Form 1116 for the UK tax, in the right category
- UK: SA108 capital gains pages with the Section 104 working
- Both: contract notes, exchange rates used and broker statements
What about shares held in an ISA or in funds?
Shares in an ISA are free of UK Capital Gains Tax, but the US does not recognise the wrapper. A gain inside an ISA is taxable on the US return with no UK tax to credit. Funds, whether held in an ISA or not, raise a separate problem: non-US funds are commonly passive foreign investment companies.
The instructions for Form 8621 (opens the official IRS page in a new tab) define a PFIC as a foreign corporation that meets an income test or an asset test, both measured by passive income and passive assets. UK unit trusts, OEICs and exchange-traded funds held through a UK broker commonly meet them. Shares in an ordinary trading company usually do not, although a UK company that is mostly passive, such as some investment trusts, can be one. Our post on whether UK investment trusts are PFICs looks at that question.
A PFIC gain is not reported as an ordinary capital gain at all, so the matching and lot rules above give way to the PFIC regime and Form 8621. If your account mixes shares and funds, our PFIC reporting service can separate them. For the wider picture, return to our guide on US-UK double taxation, or contact us to review your sales on both returns.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
