Which cost basis (US or UK) are you guys using when you sell US shares...

Which cost basis system (UK or US) are you guys using to calculate the UK capital gain when (a) you are UK resident, (b) selling US held shares held in a US brokerage, and (c) the shares were bought over time rather than all at once?

The US tracks the cost basis of each share bought, and matches up sales to specific purchases. The UK just tracks the average cost (adjusting the average up or down as additional purchases are made), and any sale uses the current average.

I tried asking HMRC, they just pointed me to docs that didn't help, so I figured I'd ask what people are actually doing.

Here's a worked example under the two systems:

1. On Jan 1st 2000, I buy Lot#1 :100 shares of DaveSoft LLC at $1 per share. Exchange rate at the time: $1 = £1
2. On Jan 1st 2010, I buy Lot #2: 100 shares of DaveSoft LLC at $10 per share. Exchange rate at the time: $1 = £2
3. Today, I sell Lot #1: 100 shares of DaveSoft LLC at $5 per share. Exchange rate is $1 = £3

Option 1: Treat the US stock sale like the sale of a generic US held asset
UK Capital Gain = Sale price - Purchase Price
    Sale price = 100 * $5 * £3 = £1,500
    Purchase price = 100 * $1 * £1 = £100
    -> Capital Gain = Sale price - Purchase price  = £1,400

Option 2: Calculate as if it were UK stock being bought and sold in the UK
Average per-share cost basis = ((100 * $1 * £1) + (100 * $10 * £2)) / 200 = (100 + 2000) / 200 = £10.50
UK Capital Gain = Sale price - Purchase Price
    Sale price = 100 * $5 * £3 = £1,500
    Purchase price = 100 * £10.50
    -> Capital Gain = Sale price - Purchase price  = £1,500 - £1,050 = £450

Option 3: It's neither of the above, I've got hold of the wrong end of the stick, and it's something completely different.
In which case

My brain / Google-Fu has failed me, because I can't find anything discussing this, yet alone a worked example. But it's something folk must be running into regularly. I initially thought it would be option #2, but if that was true, I'd expect Google to returning lots of articles and blog posts from folks complaining about having to track two cost basis for their investments.

* edit: Fixed exchange rate math as pointed out by @durhamlad

Daveb is correct that the UK and the US have different approaches to the calculation of capital gains. This includes the calculations in sterling and dollar terms. He is correct that this requires to sets of records to be kept, under the rules for each country.

For some years now, even before we moved to the UK, I have been using “Specific ID” when selling shares in our US brokerage account. It has been quite a few years since US brokerage companies have been required by law to track the cost basis of all shares on behalf of the customer.

Consequently since moving back I continued to select the specific shares I wanted to sell so I could exactly know what capital gains and losses I was incurring. I have a spreadsheet where I can enter the exchange rate on the day of the purchase and sale so that I know for sure what the gain or loss will be in £s as well as $s.

The law was changed in 2008 to require the cost basis to be tracked.

https://www.investmentnews.com/deadline-to-track-cost-basis-reporting-looms-19140

Broker-dealers, mutual fund companies and fund custodians are updating systems to comply with the cost basis reporting requirements included in the Emergency Economic Stabilization Act of 2008.

Which cost basis system (UK or US) are you guys using to calculate the UK capital gain when (a) you are UK resident, (b) selling US held shares held in a US brokerage, and (c) the shares were bought over time rather than all at once?

The US tracks the cost basis of each share bought, and matches up sales to specific purchases. The UK just tracks the average cost (adjusting the average up or down as additional purchases are made), and any sale uses the current average.

I tried asking HMRC, they just pointed me to docs that didn't help, so I figured I'd ask what people are actually doing.

Here's a worked example under the two systems:

1. On Jan 1st 2000, I buy Lot#1 :100 shares of DaveSoft LLC at $1 per share. Exchange rate at the time: $1 = £1
2. On Jan 1st 2010, I buy Lot #2: 100 shares of DaveSoft LLC at $10 per share. Exchange rate at the time: $1 = £2
3. Today, I sell Lot #1: 100 shares of DaveSoft LLC at $5 per share. Exchange rate is $1 = £3

Option 1: Treat the US stock sale like the sale of a generic US held asset
UK Capital Gain = Sale price - Purchase Price
    Sale price = 100 * $5 * £3 = £1,500
    Purchase price = 100 * $1 * £3 = £300
    -> Capital Gain = Sale price - Purchase price  = £1,200

Option 2: Calculate as if it were UK stock being bought and sold in the UK
Average per-share cost basis = ((100 * $1 * £1) + (100 * $10 * £2)) / 200 = (100 + 2000) / 200 = £10.50
UK Capital Gain = Sale price - Purchase Price
    Sale price = 100 * $5 * £3 = £1,500
    Purchase price = 100 * £10.50
    -> Capital Gain = Sale price - Purchase price  = £1,500 - £1,050 = £450

Option 3: It's neither of the above, I've got hold of the wrong end of the stick, and it's something completely different.
In which case

My brain / Google-Fu has failed me, because I can't find anything discussing this, yet alone a worked example. But it's something folk must be running into regularly. I initially thought it would be option #2, but if that was true, I'd expect Google to returning lots of articles and blog posts from folks complaining about having to track two cost basis for their investments.

In option 1 above, the purchase  price is not correct as stated since you calculated it at today’s exchange rate instead of the exchange rate back then. The purchase price was actually 100*1*1=£100. Capital gain =£1,400

In option 1 above, the purchase  price is not correct as stated since you calculated it at today’s exchange rate instead of the exchange rate back then. The purchase price was actually 100*1*1=£100. Capital gain =£1,400

Damn it. That's what you get for posting at 2am local time. I proof read the math 13 times before hitting post, and still got it wrong! I've corrected the original post to protect the guilty 

For some years now, even before we moved to the UK, I have been using “Specific ID” when selling shares in our US brokerage account. It has been quite a few years since US brokerage companies have been required by law to track the cost basis of all shares on behalf of the customer.

Consequently since moving back I continued to select the specific shares I wanted to sell so I could exactly know what capital gains and losses I was incurring. I have a spreadsheet where I can enter the exchange rate on the day of the purchase and sale so that I know for sure what the gain or loss will be in £s as well as $s.

Thanks @durhanlad, but I'm not sure if when calculating the gain from the UK's point of view, you mean you are just tracking the exchange rate (i.e. calculating the UK gain using Option #2),  or applying the cost price of specific shares (Option #1). I agree US gains will always be against specific shares (usually oldest-first if you don't specific select them), I'm just trying to work out whether folks are using that method or the UK's average cost basis method when calculating the gain for UK tax purposes.

Thanks @durhanlad, but I'm not sure if when calculating the gain from the UK's point of view, you mean you are just tracking the exchange rate (i.e. calculating the UK gain using Option #2),  or applying the cost price of specific shares (Option #1). I agree US gains will always be against specific shares (usually oldest-first if you don't specific select them), I'm just trying to work out whether folks are using that method or the UK's average cost basis method when calculating the gain for UK tax purposes.

Others will need to chime in if they use the UK average cost basis but the only time I have seen that is when I helped my sister in law do her taxes here in the UK and her UK broker provides the average cost so everything is in the same currency.  I don’t know how you can accurately calculate the capital gain from an average cost basis from a US account given  the wide variation of exchange rates, but there may well be a way that HMRC accepts.

When I bought all the shares I didn’t know  the exchange rate at the time but sites like xe.com have historical rate tables by date that I use

I don’t know how you can accurately calculate the capital gain from an average cost basis from a US account given  the wide variation of exchange rates, but there may well be a way that HMRC accepts.

I only plan on selling the stock going forward, so my average cost basis won't change further over time (even if the exchange rate changes).

As a thought experiment however, as long as complete records (dates & qty bought/sold, price, exchange rate) are kept, I think it's straightforward (but tedious) to adjust the average cost basis to reflect new purchases.

For example, in Option #2 above, we specifically sold all the shares from lot #1, so the US cost basis for the remaining 100 shares is $10/share. The UK doesn't care which shares we sold (they all have the same cost basis from the UK's point of view), so the UK average cost basis remains unchanged at £10.50.
If I buy 50 more shares at $20/share when the exchange rate is $1=£4, then the US cost basis is $10/share for the 100 old shares, $20/share for the 50 new shares, and UK average cost basis for all shares is now ( (100 * £10.50) + (50 * $20 * 4) ) / 150 = (1050 + 4000) / 200 = £25.25

(If not obvious, I'd still be using specific lots when selling and reporting / calculating capital gains on the US side)

I've absolutely no idea how this works going the other way (selling UK stocks that were purchased over time and are held in a UK non-retirement account, then reporting the gain to the US) since we can't go back from an average to individual shares, but as I've no intent of ever opening that can of worms, I can happily bury my head in the sand here.