Tread carefully in selling shares to lock in capital gains

I recently read an article you wrote on cryptocurrencies and tax and it raised a question in my head. If one was to sell shares before the year end and capitalise a loss (if loss-making), can this person then use this loss to negate any gains capitalised in a cryptocurrency portfolio, and then immediately after selling the shares at a loss buy them back that same day?

In essence, one would simply be selling the loss-making stocks to negate the gain before year end but would be continuing to hold them after they are repurchased that day.

Mr WW, email

What you are talking about is referred to as “bed and breakfasting” shares. This was a common way of maximising tax-free capital gains without actually having to sell shares which you wanted to hold on to for the longer term.

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It is not that you cannot bed and breakfast shares at all anymore but the rules have tightened. So why would you do it at all?

The whole point of bed and breakfasting shares is to make the most of the tax-free exemption allowed on capital gains each year. Anyone who makes a capital gain by selling assets is allowed to discount €1,270 of it before working out their liability to tax. The key thing is that this exemption is not transferable. You either use it within the tax year or lose it; you cannot just roll up the tax exemptions for every year you don’t use them and set them against a gain when you finally get around to selling an asset.

By offsetting gains against your annual exemption, you lower the ultimate tax charge on your investment – assuming the investment makes money at all at the end of the day.

Mostly it is used by people whose shares are rising in value to mitigate eventual capital gains tax, but there is nothing to stop you selling loss-making shares so that you can offset those crystallised losses against gains made on the sale of other assets, such as cryptocurrencies.

First in, first out

There are a couple of things you need to be aware of when you examine this approach.

First up is the notion of “first in, first out”. If you have shares in the same company, bought in stages over a period of time, when you go to sell Revenue has determined that it is the shares you have held the longest that are deemed to be those sold first. So the shares that were first into your portfolio are the first to leave when they are sold.

Clearly this only works for shares within the same company; there is nothing forcing you to sell shares in company A before those in company B simply because you acquired them earlier.

To complicate matters, there is an exception to this first in, first out rule. Worse still, it runs precisely counter to that general rule in that it is "last in, first out". The exception covers a situation where you sell shares you have bought less than four weeks previously. In this specific circumstance, section 581 of the Taxes Consolidation Act 1997 determines that the shares you have sold are those most recently acquired (within that four-week window).

The important thing here is that any loss made on such a transaction cannot be offset against gains made in other asset sales during the year.

And, if you sell shares in company A and then repurchase the same number of those same class of shares in that same company within the following four weeks, any losses crystallised by the original sale can only be offset against gains that materialise by selling those particular shares, not any others you may have in that company.

Anti-avoidance

Revenue is quite clear in stating that section 581 is an anti-avoidance measure “designed to limit the manipulation of capital losses by disposals and reacquisitions of shares or securities within a short time”.

To further complicate matters, if you sell more than you acquired within the last four weeks, those extra ones are subject to the normal first in, first out rule.

So, if you acquire 100 shares in company A today, February 22nd, in a company where you already hold stock and then, on March 16th, sell 200 of your holding in company A, the first 100 shares are treated as last in, first out, but the other 100 shares are assessed under the normal first in, first out rule.

However, outside that specific set of circumstances – buying and then selling shares in the four-week period, followed, possibly by a repurchase – I gather it is possible to sell shares for capital gains purposes and then repurchase them more or less immediately if you are minded to hold on to them.

There is a lot of confusion around this because of the wording of the Revenue guidance but the advice I received is that the problem arises only when you sell recently-acquired shares. If you are selling shares you have owned for some time, there is no impediment to buying them back.

The existence in Britain of a 30-day prohibition on reacquiring sold shares since 1998 for those looking to secure the capital gains tax benefit further muddies the waters. My understanding is that there is not the same restriction here.

So why isn’t everyone doing it?

Well, mostly because the amounts involved are fairly modest. You are saving the 33 per cent you would have paid on the amount covered by the annual CGT exemption: that amounts to just over €419. But you also have to take account of stamp duty, which, in Ireland, is charged at 1 per cent of purchases and sales of shares, as well as any broker charges.

The broker charges can be deducted from the capital gain when arriving at your net gain for the year of €1,270 or less to benefit from this arrangement, but that’s just one more complication for the sort of small shareholders who might be interested in such an arrangement.

That does not mean it is not worthwhile for some investors

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.