Cost Basis in Two Currencies for US Citizens Abroad: US Lots vs Section 104, ACB and Parcels
Published by 
Steffan Kharmaaiarvi, founder
A US citizen living in London, Toronto or Sydney reports each sale twice: to the IRS in dollars and to the country of residence in its own currency. Cost basis in two currencies is not one figure translated into another. Each country converts every purchase at the rate of its own date and then applies its own rule for which shares were sold, so a single sale can be a gain on one return and a loss on the other. This note sets out the rules for US citizens abroad in the UK, Canada and Australia, works through an illustrative example and says what Borderfolio shows. It is decision support, not tax advice.
The US side: dollars at each date, lots by identification
The US taxes a citizen on worldwide income "regardless of where you are living", and amounts on the return must be expressed in US dollars (IRS Publication 54). The IRS asks for the rate prevailing when an item is received, paid or accrued (IRS, foreign currency and exchange rates). For stock or securities traded on an established securities market and bought or sold for foreign currency by a cash-basis taxpayer, the regulations are specific: the basis is translated at the spot rate on the settlement date of the purchase, and the amount realised at the spot rate on the settlement date of the sale (Treas. Reg. §1.988-2(a)(2)(iv)).
Which shares were sold is a separate question. When lots are not adequately identified, the shares sold are charged against the earliest lot bought: first in, first out. Through a broker, adequate identification means specifying the shares at the time of sale and receiving written confirmation (Treas. Reg. §1.1012-1(c)). The average basis method is limited to shares of a regulated investment company held with a custodian (§1.1012-1(e)).
The currency itself can produce a result too. Sterling or Canadian dollars are non-functional currency for a US person, and disposing of non-functional currency is a section 988 transaction whose gain or loss is ordinary (IRC §988(a)(1)(A), (c)(1)(C)). The relief for personal transactions, with its USD 200 exclusion, does not cover a transaction to the extent its expenses fall under section 212, which deals with income-producing activity (§988(e)). Spending sterling that was bought earlier on a share purchase is therefore a point for the client's US preparer, separate from the gain on the shares.
The residence side: the UK, Canada and Australia
- United Kingdom. The acquisition cost is the sterling equivalent at the exchange rate in force at the date of acquisition, and the proceeds at the date of disposal (HMRC CG78310). A sale is matched first with shares bought the same day, then with shares bought in the following 30 days (if the person was UK resident when buying), and only then with the Section 104 holding, where every share is treated as acquired at the same average cost (HMRC HS284 (2025)).
- Canada. The adjusted cost base is converted at the rate in effect when the property was acquired, the proceeds at the rate when it was sold, and the average cost of identical properties is recalculated at each purchase (CRA T4037). On becoming resident, each property (with exceptions such as taxable Canadian property) is deemed sold and reacquired at its fair market value (Income Tax Act s.128.1(1)(b)–(c)). The US keeps the original cost.
- Australia. Foreign-currency amounts are translated into Australian dollars, elements first and the result after (ITAA 1997 s960-50(1), (4)). A person who becomes resident, other than a temporary resident, is taken to have acquired CGT assets at market value that day, except pre-CGT assets and taxable Australian property (ATO, how changing residency affects CGT).
Why a gain in one currency can be a loss in the other
- The exchange rate moved. If sterling weakened between purchase and sale, a dollar-priced holding can gain in pounds while losing in dollars, and the reverse.
- Different shares are sold. The US charges the sale to a lot (the earliest, unless another is identified); the UK and Canada use a pooled average. With purchases at different prices, the cost differs even before currency.
- The cost was reset on arrival. In Canada and Australia, shares brought in take their arrival-day value; the US cost is still the price paid years earlier.
The credit does not fix this. The US credit is for foreign income taxes paid or accrued (IRC §901(b)(1)). If the UK sees a loss, there is no UK tax on that sale to credit against the US gain.
A worked example
Illustrative figures only, with round exchange rates and no fees. A US citizen resident in the UK holds a US-listed ETF in a UK general account. Assume the same rate on trade and settlement dates, no purchase on the day of the sale or in the 30 days after, and GBP/USD as shown.
| Event | Shares | USD | GBP/USD | GBP |
|---|---|---|---|---|
| Purchase, lot 1 | 100 | 40,000 | 1.60 | 25,000 |
| Purchase, lot 2 | 100 | 50,000 | 1.25 | 40,000 |
| Sale | 100 | 44,800 | 1.40 | 32,000 |
- US, first in, first out: proceeds USD 44,800 less lot 1 at USD 40,000 = a gain of USD 4,800.
- US, lot 2 identified at the sale: USD 44,800 less USD 50,000 = a loss of USD 5,200.
- UK, Section 104: the pool holds 200 shares at GBP 65,000, an average of GBP 325 a share; 100 shares cost GBP 32,500. Proceeds GBP 32,000 less GBP 32,500 = a loss of GBP 500.
One sale, three answers. Under the default rule the client reports a dollar gain and a sterling loss, with no UK tax to credit against the US tax. Identification before the trade would change the US result; nothing changes the UK result, because the pool is fixed by law. In Canada the same numbers would use the average across all the client's non-registered accounts, and shares held on arrival would start from their arrival-day value. The point for an adviser is the order of work: decide the lot with the client's US preparer before the sale, not after.
What Borderfolio shows
For a client whose profile marks them as a US person and whose residence is the UK, Canada or Australia, the Cross-Border tab adds a finding, "Cost basis in GBP and USD" (or CAD, AUD):
- The confirmed transactions in accounts without a tax wrapper are replayed twice, each trade converted at the exchange rate of its own date: once under the residence's rule (the Section 104 pool after same-day and 30-day matching; Canadian average cost across non-registered accounts, with the superficial-loss rule; Australian parcels), once under US first in, first out, account by account.
- Each holding shows its unrealised gain in both currencies at today's price and rate; holdings with a gain in one and a loss in the other are named.
- For Canada and Australia the residence cost of shares held on arrival is the value the adviser enters for the arrival date; without one it reads "value on arrival", never a guess.
- A holding bought before the imported history, or transferred in without a cost, is listed with the reason rather than given a cost.
Not modelled: no US or local tax is computed and no form is prepared; the US wash-sale rule (IRC §1091) is not applied; specific identification and average basis are not applied on the US side (first in, first out only), and Australian parcels are taken first in, first out as an assumption; trades are converted at the trade date's rate, not the settlement date's; currency gains on cash under section 988 are not computed; and the dual basis is shown only for residences in the UK, Canada and Australia. For the move itself, see planning a client relocation; for the wider US-person review, Borderfolio for US persons abroad.
Not tax advice. This article is general information for professional advisers, written from the sources linked in it as read on 3 November 2026. It does not compute anyone's tax; the client's US and local tax preparers apply the rules to the facts.
Frequently asked questions
Can a US citizen in the UK use the Section 104 cost on the US return?
No. The US return is in dollars, with each purchase and sale translated at its own date, and the shares sold are identified under the US rules: first in, first out unless a lot is adequately identified. The Section 104 pool is a UK computation in sterling.
Why can the same sale be a gain in dollars and a loss in pounds?
Because the exchange rate moved between purchase and sale, because the two countries treat different shares as sold (a lot in the US, a pooled average in the UK and Canada), or because Canada and Australia reset cost to market value on arrival while the US does not.
Does Borderfolio calculate US capital gains tax?
No. It shows each holding's unrealised gain in dollars and in the residence currency under each country's rule, and names holdings where the two differ in sign. The tax itself, lot elections and the forms are for the client's tax preparers.