Cost basis for imported shares formerly in an ISA

Question

I recently became a resident of the US. I was formerly a resident of the UK. I transferred my stocks and shares from the UK to a US broker shortly after I moved.

I understand that when selling these stocks my cost basis for tax purposes is the value from when I originally brought them back in the UK.

However some of these stocks, brought around 2011 were originally placed into an ISA account. A couple of years later around 2013 I transferred them out of the ISA into a normal brokerage account.

For the stocks which were originally held in my ISA, I am unclear if the cost basis for US tax purposes is the value of initial purchase, or the value when they were transferred out of the ISA account?

I cannot find clear information of this, as normally for UK taxes stocks held in an ISA are capital gains immune and the cost basis is only created when they are moved out of the account but it is unclear to me if the IRS respects this rule for those who become residents of the US. (If it is important I became a US resident after moving the stocks out of the ISA).

Answer 1

I'm not familiar with the tax treaty the US has with the UK which may affect this. But generally, cost basis is what you paid. So in your situation, the flow is like this:

1. Pay X GBP for Y shares, put it into ISA account.
2. Wait 297 years
3. Take Y shares out of the ISA account, now worth X^2 GBP - the gain is tax free in the UK.
4. Move to the US
5. Become US tax resident
6. Sell Y shares for (X^2+1)GBP in USD
7. Pay taxes on...?

You're asking whether in step 7 the amount is 1GBP or (X^2+1-X)GBP.

The answer is: neither.

Assuming tax treaty doesn't have a say in this, your cost basis is X GBP in US dollars at that time. I.e.: you need to look up the GBP-USD rate on the day you bought the Y shares, and convert X GBP into Z USD at that rate.

Then, your gain is the difference between the sale proceeds (in USD at the time of sale) and the purchase cost (in USD at the time of purchase).

Step 3 is meaningless, in this situation (unless, again, the tax treaty specifically addresses this).

Keep in mind that since you're a US tax resident, the tax treaty will not apply to you for most parts due to the savings clause. So you need to read it very carefully to see if anything, if at all, can help you there.

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Obviously, if the amounts are significant you should talk to a tax adviser (EA/CPA licensed in your State) who'd read and analyze the tax treaty for you and would see what you can do in this situation. But the prudent action would have been to sell and repurchase between steps (3) and (4) to re-establish the US tax basis while reaping the UK tax benefit.