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Capital Gains

The problem of capital gains.


When I buy a Quantity of an asset at a Price. The Proceeds is the negation of the Quantity times the Price i.e. when it is negative it is the cost and when it is positive it is the return of the transaction.

When I hold a Position in an asset class the total Basis is the cost (including commissions and taxes) of getting to that position less any realised Profit or Loss taken. (A costs are positive in the basis so as quantity increases so does basis!)

Thus the average price of a position can be calculated as the Basis/Quantity.

When making a transaction the Realised P/L will need to be worked out if the magnitude of the Quantity is reduced by the transaction e.g. if the quantity was 78 but after the transaction its 73 or if the quantity was -78 but after the transaction its -73 both are reductions in magnitude.

Superimposed Positions

A trader can also choose to superimpose a position, i.e. to ignore the current position and "trade over it" i.e. perform two or more transactions that finally lead to no change in quantity. The trader is effectively opening two positions in the same asset class. Once all positions are closed the result is the same. However it does change when profits or losses are realised and so can change tax liabilities.

UK capital gains rules require traders to consider a days trading as a position held over the months trading position held over the base trading position. This can make things awkward as it is a clumsy implementation of what could be done more elegantly. 

Nested Assets

What happens when I buy dollars with sterling to buy shares? The positions can be treated independently i.e. the shares can be regarded as bought with a loan and P/L realised, and totally separately the position in dollars can be taken and P/L realised. The result is the same. So nesting has no effect.

Loop Trades

If I use pounds GBP to buy EUR then EUR to buy CAD then CAD to buy GBP. The market isn't set up to deal with these trades and it is expected that an asset is bought and then sold, however these trades can easily happen with currencies.

Clearly the basis is the initial cost in pounds.

Because the UK tax office will regard the EUR as having been disposed of when the CAD are purchased, the whole operation becomes equivalent to opening a position in EUR then closing it and using the P/L to open a position in CAD and then closing that. Thus they like to pretend that the EUR are sold for GBP which are immediately used to buy CAD in two imaginary transactions.

Because the currency pairs normally traded are EURGPB, EURCAD and GBPCAD it gets awkward.

Any trading platform will correctly keep the GBP Basis of a holding of EUR bought with GBP but...

when the CAD are purchased by selling EURCAD a basis will be kept in CAD.

Finally when the CAD are sold by buying GBPCAD a basis will be kept in CAD.

How do you calculate the capital gains? Clearly one can simply use the initial GBP basis against the final amount of GBP. That's one route, but can it be done in two stages? Obviously the EURGBP gain is easy because the basis is in GBP but the EURCAD and GBPCAD?

Given the imaginary transactions the second stage is a sale and then purchase of GBPCAD. The basis is held as the cost in CAD so will be negative then positive. 

© Tom de Havas 2011. The information under this section is my own work it may be reproduced without modification but must include this notice.

Column Description
Symbol The symbol of the contract you traded.
Date/Time The date and the time of the execution.
Exchange The exchange that the trade took place.
Quantity The number of units for the transaction.
T. Price The transaction price.
C. Price The closing price of the contract.
Proceeds Calculated by mulitplying the quantity and the transaction price. The proceeds figure will be negative for buys and positive for sales.
Comm/Tax The total amount of commission and tax for the transaction.
Basis The basis of an opening trade is the inverse of proceeds plus commission and tax amount. For closing trades, the basis is the basis of the opening trade.
Realized P/L Calculated by adding the proceeds of the closing trade plus commissions and then adding the basis.
MTM P/L The difference between the transaction price and closing price multiplied by the quantity.
Code The code abbreviation.