Does selling dividends trigger cgt on principle?

Seurat

Hi,

I have shares which clock up dividends every year.

As Revenue uses a FIFO system wrt CGT on sale of shares..when I sell dividends will I also have to pay CGT using the purchase price of the oldest share?

eg

i bought 10 shares in 2021 at €10 per share

in 2022 I receive dividend of 1 share

I sell this 1 share for €20 (and will have to pay income tax on receipt of it) but will its purchase price be assumed to be €10 or €20

thanks

_gir

My understanding of cgt is that the purchase price will always be what you initially paid. if the assets value increases and then you sell it, you will have to pay CGT on the increase (in this case the extra 10 euro)

3DataModem

My understanding is that you will be liable for income tax on the value of the dividend on the day it was paid (e.g. if the share was worth 20, you pay income tax on 20). You are then subject to CGT on any increase from 20 (i.e. you are assumed to have acquired the share for 20).

Peregrinus

I'm assuming that this shareholding is in no way connected with your employment; this isn't an aspect of any kind of employee share incentive scheme.

SFAIK I think it works like this:

1. Income tax on the dividend: you can't avoid tax on dividends by receiving the dividend in the form of shares rather than cash. So you are liable to income tax on the value of the shares at the time your received them in exactly the same way as you would be if the dividend had been paid in cash. So if you get a share worth €20, that's treated as if you had received a cash dividend of €20. Note that this income tax liability arises whether or not you later sell the shares.
2. If you later sell the shares, CGT is worked out like this. You originally bought 10 shares at €10 per share - so total acquisition cost is €100. In 2022 you received one more share, and paid tax on €20. For CGT purposes you are not treated as acquiring a new asset, but as enhancing the value of the asset you have already acquired, so that €20 is added to the base cost of your shareholding. You are now holding 11 shares with a base cost of €120, or €10.91 per share. A year later (say) you sell one share for (say) €25; your gain on that share is calculated as €(25 - 10.91 =) €14.09.

Seurat

https://www.boards.ie/discussion/comment/118614199#Comment_118614199

@Peregrinus that sounds like it could actually be true.

Can I take this a step further though?

Assume I bought 10 shares also in 2020 at  €5 each, 10 shares in 2021 at  €10 each.

I get 2 shares dividend, so bv have to pay the income tax on both.

By your metrics does my entire share cost basis now change to ( €150/12)= €6.81

Peregrinus

No. I think it works like this: The award of a share by way of a dividend is treated as an enhancement of an asset, not the acquisition of a new asset (just like when you build an extension onto your house). So, your 2020 holding of 10 shares has been enhanced by 1 share, and your 2021 shareholding has been enhanced by 1 share.

Lets say, when the dividend is paid, the shares are worth €15, so each share is subject to income tax on €15, and for CGT purposes you are treated as though you had spend €15 enhancing your asset.

So, the cost base of your 2020 shareholding is now €(50 + 15)/11 = €5.91 per share. The cost base of your 2021 shareholding is now €(100 + 15)/11 = €10.45 per share.

If you now sell one share for €20 the usual first-in-first-out rule applies, so you have a base cost of €5.91, and so a gain of €14.09. Your remaining 2020 shareholding is reduced to 10 shares. Your 2021 remains at 11 shares and the cost base is unaffected.

Seurat

Ah ok that actually makes sense as otherwise you could possibly be paying 70/80% overall tax which would be an incentive not to invest in shares