Reporting Dividends and Capital Gains Distributions from US Mutual Funds

This thread appears around eight years old and to me it is still as relevant as when it was written so I think it's time to re-activate. I hope it pops to the top so others having the same experience with reporting US capital gains on mutual funds to HMRC can contribute. Such a confusing area.

As background, I'm a dual US-UK citizen residing in the UK. I sold US Vanguard mutual funds in 2021. Despite having a specialist tax preparer for both my US and UK taxes, I have struggled to crack how to report capital gains from mutual funds in a Vanguard brokerage account to HMRC.

I just spent way too much of my winter leave speaking with Vanguard, HMRC, and my tax advisors - I reckon around eight hours dealing with this at this point despite paying premium for specialist advice.

Anyway, as the posters above point out, the 1099-DIV provided by Vanguard US does not appear to be helpful for the HMRC because the date of acquisition is stated as "various". My UK tax expert called the 1099 "useless" and when Vanguard was not able to supply exact versions of the various acquisition dates called them "lazy". My advisor also told me that I will be liable for fines and penalties if I do not provide the acquisition dates, which Vanguard cannot seem to give me. Needless to say I have already hired a new UK tax advisor, hoping for better luck next time around.

A HMRC technical expert called me back at 8:50am this morning. Out of my jet lagged slumber I awoke to an insistence from them that US Vanguard could of course tell me the acquisition dates of all my shares. And that HMRC have never encountered this problem before. Which I find very hard to believe, especially given the above discussion.

It is baffling to me that HMRC keep insisting for detail that US Vanguard repeatedly says they do not provide. Surely HMRC have experience with  international capital gains.Therefore HMRC can appreciate requesting information that is not usually recorded in the respective country for that tax
system will be non standard and therefore an issue. No wonder some people make errors on their tax returns.

Finally, the HMRC expert advises that I can in fact use the dates I put money into Vanguard to make transactions as the date of acquisition and - unbelievably - ignore the dates of the re-investments. The HMRC expert also says that I do not need to match up the dates I sold the mutual funds to the exact dates they were purchased. And that if my UK tax advisor has any issues with this they can call their dedicated advisor line. So, seemingly, I can just look at my bank account to see what I bought versus what I took out, using the dates on my bank account, and go from there.

I await my completed tax documents from my UK tax advisor. I have very little hope for an end to this ordeal. I am happy to pay but HMRC do not seem to be able to tell me how much they want.

I can see the difficulties because the foreign exchange rates on the date of the sale and purchase of shares is needed to accurately calculate the gain or loss in GBP.  Outside of my IRAs I stopped choosing the option to reinvest shares in my mutual funds because it resulted in large numbers of purchases of shares which were extremely difficult  to track. Since about 2011 the IRS required all shares to be “covered” shares which meant that the brokerages were obliged to track and report back the basis of shares to the IRS.

I would have thought that the brokerage should have records of all the purchases made within a fund provided that the fund had been with them from the very start. I would simply do my best to find out or estimate the dates of purchase of the shares being sold.

Thank you so much durhamlad. The language of 'covered' actually solved this. I googled 'what are IRS covered shares'. Which then immediately led me to a site from Vanguard  about covered shares vs noncovered shares and cost basis with a special note on how to calculate this (my account - cost basis - unrealized gains losses / realized gains losses - select account -show details). I was able to change the basis from average cost to first in and first out (which I now know about thanks to this message board - not my tax preparers...). Then, on the Vanguard reports, the dates mostly changed from 'various' to specific dates. Hurrah! The only problem is that for those I already sold the dates are still various. For the future I will keep it as first in first out to hopefully reduce these complications. And now ask Vanguard again if they can re-create this report for the sold shares....

Thank you so much durhamlad. The language of 'covered' actually solved this. I googled 'what are IRS covered shares'. Which then immediately led me to a site from Vanguard  about covered shares vs noncovered shares and cost basis with a special note on how to calculate this (my account - cost basis - unrealized gains losses / realized gains losses - select account -show details). I was able to change the basis from average cost to first in and first out (which I now know about thanks to this message board - not my tax preparers...). Then, on the Vanguard reports, the dates mostly changed from 'various' to specific dates. Hurrah! The only problem is that for those I already sold the dates are still various. For the future I will keep it as first in first out to hopefully reduce these complications. And now ask Vanguard again if they can re-create this report for the sold shares....

That is great to hear, well done.  I am a Vanguard customer and I have all my elections for distributions to go to the settlement fund so I can decide if I want to move these funds to my bank or reinvest them.  I am familiar with the realized/unrealized gains option on the Vanguard site with the "specific id" option, and before I sell shares I will look at the buy dates and using a spreadsheet I have put in the exchange rates of the dates of purchase and see how many shares I can sell without paying too much in HMRC taxes.  There is tax free limit for capital gains in addition to the personal tax free limit.  It is currently  £12,300 but from April it is dropping to £6,000 then £3,000 the following year.

I think it will help to preface this response by saying that is what is described is routine at our firm and the kind of thing we see every week.  From a UK perspective we do not however know if the funds sold are reporting funds or non-reporting funds. Without knowing this, it is impossible to respond accurately. Assuming - however - that these are reporting funds, one would report as foreign dividends the actual dividends, plus the capital gains distributions plus ERI.  Capital gains will be calculated using what is known as a section 104 share pool - which is a UK variety of average cost. Losses can be set against gains.  A first in first out identification method is never accepted for UK tax calculations.

If - alternatively - these are non-reporting funds, one would report as foreign dividends the actual dividends, plus capital gains distributions.  Capital gains will be calculated using a last-in first out method. Any losses cannot be set against gains.  A first in first out identification method is never accepted for UK tax calculations.

Moving to identifying specific dates of acquisition, whether for a section 104 share pool or last in first out calculations, as a dually US and UK qualified tax professional, what I can tell is is what we - and all other professionals do - which is to use estimated dates of acquisition if the exact data is not available.  So long as reasonable estimates are made - and spot exchange rates are used - HMRC will accept the calculations.