Capital gains tax and margin loans (UK)

External question — Personal Finance Stack Exchange Author: SystemParadox Original post: https://money.stackexchange.com/questions/165165 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I used the margin trading on Binance and I'm trying to calculate capital gains tax (I am in the UK). I will be using crypto as an example, but my question should be applicable to any fungible asset such as normal shares. Consider the following simplified example: I borrow 1000 ADA (worth 500 GBP at the point of taking out the loan) I immediately sell 1000 ADA into the market for 500 GBP At some point later, the price of ADA has dropped and I buy 1000 ADA for 400 GBP For simplicity assume this is more than 30 days later I immediately repay the 1000 ADA loan I now have 100 GBP and no loan I see conflicting information, many people seem to suggest that taking out and repaying the loan do not count as disposal/acquisition and so don't trigger CGT events. However, HMRC's crypto guidance suggests in various places that it does consider loans to be acquisions and disposals (see https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto61650 ). So, assuming that loans are like any other transaction, I have the following calculation: Selling the 1000 ADA into the market and taking out the 1000 ADA loan happen on the same day, so following the "same day" CGT rule, these transactions are matched. Since the value is the same for both, the gain from selling into the market is 0. Buying the 1000 ADA back from the market and repaying the 1000 ADA loan happen on the same day, so following the "same day" CGT rule, these transactions are matched. Since the value is the same for both, the gain from repaying the loan is 0. At this point I realise that my total gain is 0 and I appear to have made 100 GBP tax free, so clearly I'm missing something. The question is what? Note that the loan is specifically in ADA , it's not a loan in GBP that I used to buy ADA with. If we assume that taking out and repaying loans do not count to CGT then clearly the cost basis for that asset is the value at the point of taking out the loan. But how does this interact with pooling, the section 104 holding, and the bed'n'breakfasting rules? When determining the gain for sales, what are the rules for how they match up? Normally the rules are: Pool all disposals and acquisions on the same day Match disposals against acquisions on the same day first Match disposals against acquisions within 30 days Match disposals against the value in the S104 holding If loans don't count as normal transactions then where do the loaned assets fit into this? And should they be allocated into the S104 holding or kept separate?

External answer — Personal Finance Stack Exchange Author: SystemParadox Original post: https://money.stackexchange.com/a/165167 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I think I've worked out what I'm missing. Taking out and repaying loans are acquisitions and disposals. The key is that when paying back the loan the current market value is irrelevant - the gain should be calculated relative to the cost basis of the outstanding loan vs the cost basis of the assets being used to pay it back. So in this example: Borrowing 1000 ADA for 500 GBP results in 1000 ADA in the S104 holding with a cost basis of 500 GBP and a loan of 1000 ADA with a cost basis of 500 GBP. Selling 1000 ADA for 500 GBP means the S104 holding is now empty. The loan is unaffected. Buying 1000 ADA for 400 GBP results in an S104 holding of 1000 ADA with a cost basis of 400 GBP. When repaying the loan, we use the cost basis of 400 GBP from the S104 holding vs the outstanding loan basis of 500 GBP, giving a gain of 100 GBP for repayment of the loan. Obviously in my example things happen on the same day so they don't actually go into the S104 holding, but the result is the same and does work consistently for the 30 day rule also. This also seems to work out correctly in the reverse or mixed cases - if for example the price of ADA had risen between taking out the loan and the initial sale then the sale will result in a gain relative to the acquisition when the loan was taken out, and the gain on repayment is still calculated based on the subsequent purchase price vs the loan basis, which could mean a further gain or a loss depending on the price action.

External answer — Personal Finance Stack Exchange Author: Ganesh Sittampalam Original post: https://money.stackexchange.com/a/165169 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. This HMRC guidance page actually contains the rules for short sales although not explicitly spelled out that way: the identification rules set out below apply, even if the particular shares were identified in some other way when they were disposed of, or when they were transferred or delivered to the acquirer disposals must be identified in the following order: Against acquisitions on the same day, TCGA92/S105(1)(b), see CG50822. This is known as the “same day rule”. Against acquisitions within the 30 days following the disposal, provided the person making the disposal was resident in the United Kingdom at the time of the acquisition, TCGA92/S106A(5) and (5A), see CG51560. This is known as the “bed and breakfast” rule. Against shares in a Section 104 holding, but without identifying any particular shares in that holding, TCGA92/S104. Finally against acquisitions following the disposal (and not already identified under stage 2 above), taking the earliest acquisition first, TCGA92/S105(2). The final rule can only become relevant in the case of short sales. So I think you are supposed to ignore the loan for CGT purposes and just match the disposal against the future acquisition assuming none of the other rules kick in first. If the loan has fees associated with it I assume you can take those off as costs of acquisition/disposal. I'm not at all an expert on this but searching the web found this discussion that pointed to those rules.