I recently read an article you wrote about cryptocurrencies and taxation and it raised a question in my head. If one were to sell shares before the end of the year and capitalize a loss (if in deficit), can that person then use that loss to offset any capitalized gains in a cryptocurrency portfolio, and then immediately after having sold the shares at a loss buy them back the same day?

In essence, we would like would simply sell the loss-making shares to reverse the gain before the end of the year, but continue to hold them after they were redeemed that day.

Mr WW, email

What you are talking about is called “guesthouse” shares. It was a common way to maximize tax-free capital gains without having to sell stocks you wanted to hold for the longer term.

It’s not that you can’t share guest rooms at all anymore, but the rules have gotten tighter. So why would you at all?

All the interest of the shares of bed and breakfast is to make the most of the tax exemption granted each year on the capital gains. Anyone who realizes a capital gain by selling assets is allowed to deduct €1,270 before determining their tax liability. The bottom line is that this exemption is not transferable. Either you use it during the tax year or you lose it; you can’t just roll up the tax exemptions for each year you don’t use them and deduct them from a gain when you finally get to sell an asset.

By offsetting the gains against your annual exemption, you reduce the ultimate tax burden on your investment – assuming the investment is making money at the end of the day.

It is mainly used by people whose stocks increase in value to mitigate possible capital gains tax, but nothing prevents you from selling loss-making stocks so that you can offset these crystallized losses against the gains realized on the sale. other assets, such as as cryptocurrencies.

First in, first out

There are a few things you need to be aware of when looking at this approach.

First of all, the concept 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 the shares you have held the longest are deemed to be sold first. So the stocks that were first in your portfolio are the first to come out when they are sold.

Clearly this only works for shares within the same company; you are not required to sell shares of company A before those of 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 precisely goes against this general rule in that it is “last in, first out”. The exception covers a situation where you sell shares that you bought less than four weeks ago. In this specific circumstance, section 581 of the Taxes Consolidation Act 1997 determines that the shares you sold are those which were acquired most recently (within that four week window).

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

And, if you sell shares of company A and then buy back the same number of shares of the same class in that same company within four weeks, any loss crystallized by the initial sale can only be offset by the gains that materialize by selling those particular shares. shares, no others that you may have in this company.

Anti-avoidance

Revenue is pretty clear in stating that Section 581 is an anti-avoidance measure “intended to limit the manipulation of capital losses by dispositions and reacquisitions of stock or securities on short notice.”

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

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

However, outside of this specific set of circumstances – buying then selling shares during the four-week period, possibly followed by a redemption – I assume it is possible to sell shares for the purpose of gain in capital and then redeem them more or less immediately if you are willing to stick with it.

There’s a lot of confusion around this due to the wording of the earnings guidelines, but the advice I’ve received is that the issue only arises when you’re selling recently acquired shares. If you’re selling shares you’ve held for a while, there’s nothing stopping you from buying them back.

The existence in Britain of a ban on the redemption of shares sold for 30 days since 1998 for those seeking to obtain the tax advantage on capital gains further muddying the waters. I understand there is not the same restriction here.

So why isn’t everyone doing it?

Well, mostly because the amounts involved are quite modest. You save the 33% that you would have paid on the amount covered by the annual CGT exemption: this represents just over €419. But you also need to consider stamp duty, which in Ireland is charged at 1% on buying and selling shares, and brokerage fees.

Brokerage fees can be deducted from the capital gain when you arrive at your net gain for the year of €1,270 or less to qualify for this arrangement, but that’s just one more complication for the type of small shareholders who might be interested in such an arrangement. .

That doesn’t mean it’s not worth it for some investors

Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected] This column is a reading service and is not intended to replace professional advice.