When you sell an asset for more than you initially paid, the profit is known as a capital gain. Calculating capital gains is crucial for investors, as it affects overall investment returns and determines tax liabilities. For anyone managing a portfolio, understanding how to calculate gains accurately is a key aspect of financial planning and compliance.
This article focuses on two methods for calculating capital gains in Thailand: FIFO (First-In-First-Out) and Moving Average Cost. Each method uses a different approach to determine the cost basis, which impacts the amount of taxable gain. By understanding these methods, investors can make informed decisions, manage their tax obligations, and achieve more effective investment tracking.
This article focuses on methods for calculating capital gains. For a broader overview of how capital gains are taxed in Thailand, click here.
Why Use Different Calculation Methods?
Purpose of Different Methods
Investors can choose between different calculation methods—FIFO (First-In-First-Out) and Moving Average Cost—when determining the cost basis of their assets. Each technique uniquely calculates capital gains, allowing investors to align their reporting with their financial strategy and specific tax considerations. Investors can decide which method to use as long as they apply the same method consistently throughout the tax year.
Implications for Investors
The choice of calculation method directly impacts reported capital gains, affecting both taxes and financial reporting.
Here’s how each method can impact outcomes:
- FIFO matches the earliest costs with current sales, leading to lower reported gains in rising markets or higher gains in declining markets.
- Moving Average Cost smooths out costs by averaging all purchase prices, making it suitable in volatile markets. However, it requires continuous updates.
Since each method produces different results, investors should consider their specific circumstances and tax obligations. Applying the same method consistently within each tax year ensures compliance and makes tracking gains or losses accurately across all transactions easier.
FIFO Method (First-In-First-Out)
Definition of FIFO
The FIFO (First-In-First-Out) method assumes that the first assets purchased are the first ones sold. This approach creates a specific order for calculating capital gains, where each sale is matched to the earliest purchase costs until those units are exhausted. FIFO is a straightforward method that helps investors determine the cost basis of their assets over time.
How FIFO Works
To illustrate FIFO in action, consider an example where an investor purchases an asset at different prices across several dates:
- Purchase History:
- January: 10 units at 1,000 baht each.
- March: 5 units at 1,200 baht each.
- June: 8 units at 1,500 baht each.
- Sale:
- November: 10 units sold at 2,000 baht each.
Using the FIFO method, the 10 units sold in November are matched with the January purchase price of 1,000 baht per unit. Therefore, the cost basis for the sale is 10 x 1,000 = 10,000 baht. The capital gain is calculated as follows:
- Sale proceeds: 10 units x 2,000 baht = 20,000 baht
- Cost basis (January purchase): 10,000 baht
- Capital gain: 20,000 – 10,000 = 10,000 baht
Advantages of FIFO
- Easier to Track for Infrequent Purchases: FIFO is straightforward, especially for investors who make occasional purchases, as it simply follows the order of acquisition.
- Potentially Lower Tax Impact in Rising Markets: In a market where asset prices increase over time, FIFO can result in a lower taxable gain, as the first (often cheaper) units purchased are sold first, potentially reducing the overall gain reported.
Disadvantages of FIFO
- Higher Taxable Gains in Falling Markets: FIFO may lead to higher taxable gains in declining markets since the first assets bought (at potentially higher prices) are counted as sold first.
- May Not Represent a True Average Cost: FIFO can produce a cost basis that doesn’t reflect the average purchase price of all units, especially if there are significant price fluctuations, which may affect the perceived accuracy of reported gains.
FIFO is particularly useful for investors seeking a simple, consistent method, but it may not suit everyone, especially in volatile markets where prices fluctuate significantly.
The Moving Average Cost Method
Definition of Moving Average Cost
The Moving Average Cost method calculates an average purchase price across all units held. Each time new units are purchased, the cost basis is adjusted to reflect an average of all acquisitions, smoothing out cost variations over time. This method can provide a more stable, consistent view of the cost basis, especially in markets where asset prices fluctuate significantly.
How Moving Average Cost Works
Let’s walk through an example of how the Moving Average Cost method calculates the cost basis:
- Purchase History:
- January: 10 units at 1,000 baht each.
- March: 5 units at 1,200 baht each.
- June: 8 units at 1,500 baht each.
- Calculating the Moving Average Cost:
- After January purchase:
- Total units = 10
- Total cost = 10 x 1,000 = 10,000 baht
- Average cost per unit = 10,000 / 10 = 1,000 baht
- After March purchase:
- Total units = 15 (10 + 5)
- Total cost = 10,000 + (5 x 1,200) = 16,000 baht
- Average cost per unit = 16,000 / 15 = 1,067 baht (rounded)
- After June purchase:
- Total units = 23 (15 + 8)
- Total cost = 16,000 + (8 x 1,500) = 28,000 baht
- Average cost per unit = 28,000 / 23 = 1,217 baht (rounded)
- Sale:
- November: 10 units sold at 2,000 baht each.
Using the Moving Average Cost, the cost basis for the November sale would be based on the final average cost of 1,217 baht per unit:
- Sale proceeds: 10 units x 2,000 baht = 20,000 baht
- Cost basis (average cost): 10 x 1,217 = 12,170 baht
- Capital gain: 20,000 – 12,170 = 7,830 baht
Advantages of Moving Average Cost
- Provides a Balanced, Smoothed-Out Cost Basis: This method evens out the cost basis by averaging all purchases, which can be particularly beneficial in volatile markets where prices vary widely.
- Useful in Volatile Markets: In fluctuating markets, the Moving Average Cost method offers a stabilised cost that doesn’t overly reflect the highs or lows of individual purchase prices.
Disadvantages of Moving Average Cost
- Requires Updating with Each Purchase: Every new purchase affects the average cost, requiring recalculations, which may be complex for active investors who frequently buy assets.
- Can Complicate Record-Keeping and Reporting: Frequent updates to the cost basis may complicate record-keeping, especially if assets are bought and sold regularly, making tracking for tax purposes more demanding.
The Moving Average Cost method is suitable for investors who prefer a steady, smoothed-out cost basis but may be less attractive to those who actively trade and need a more straightforward approach.
Choosing the Right Method for Your Investments
Consider Market Conditions
The choice between FIFO and Moving Average Cost often depends on market conditions. In a rising market, where asset prices generally increase over time, FIFO can be beneficial as it typically assigns a lower cost basis, potentially resulting in lower taxable gains.
By contrast, in a volatile market with frequent price fluctuations, Moving Average Cost can help stabilise the cost basis, averaging out highs and lows. This can be advantageous for investors looking to smooth out the impact of extreme price changes on their reported gains.
Personal Investment Strategy
When selecting a calculation method, it’s essential to consider your investment style, purchase frequency, and long-term objectives:
- Investment Style: If you’re a buy-and-hold investor with occasional purchases, FIFO’s simplicity may suit your needs. Conversely, for investors who make regular purchases, Moving Average Cost may offer a clearer view of average holdings.
- Frequency of Purchases: Investors who frequently buy assets may find Moving Average Cost beneficial, as it provides a consistent average cost. However, for those making infrequent purchases, FIFO could offer a more straightforward approach.
- Long-Term Goals: Depending on your financial strategy, one method may align better with your tax planning. If minimising gains is a priority in the short term, FIFO might offer advantages, while Moving Average Cost can provide a more balanced approach over time.
Consistency Matters
For each tax year, you’re required to choose one calculation method and use it consistently across all transactions, as switching between methods within the same year isn’t allowed. This ensures clarity in your records, making tracking capital gains or losses easier and reporting accurately at tax time.
When selecting a method, consider your investment strategy and market conditions to choose the approach that best fits your financial and tax planning goals.
Practical Case Studies of Each Method
This section will examine case studies to demonstrate how the FIFO and Moving Average Cost methods work under different market conditions. These case studies illustrate how each method can yield different results, helping you understand which approach might be more advantageous depending on your circumstances.
Case Study 1: Volatile Market
Purchase History
- January: 10 units at 1,000 baht each.
- April: 5 units at 800 baht each.
- July: 8 units at 1,200 baht each.
Sale:
- October: 10 units sold at 1,500 baht each.
FIFO Calculation
Using FIFO, the first 10 units sold are matched with the earliest purchases made in January.
- Cost basis:
- 10 units from January at 1,000 baht = 10,000 baht
- Capital gain:
- Sale proceeds = 10 units x 1,500 baht = 15,000 baht
- Capital gain = 15,000 – 10,000 = 5,000 baht
Moving Average Cost Calculation
With the Moving Average Cost method, the cost per unit is averaged out across all purchases, and this average is used to calculate the cost basis for the sale.
- Calculate Average Cost per Unit:
- After January purchase: Average cost per unit = 1,000 baht
- After April purchase:
- Total units = 15 (10 + 5)
- Total cost = (10 x 1,000) + (5 x 800) = 10,000 + 4,000 = 14,000 baht
- Average cost per unit = 14,000 / 15 = 933 baht (rounded)
- After July purchase:
- Total units = 23 (15 + 8)
- Total cost = 14,000 + (8 x 1,200) = 14,000 + 9,600 = 23,600 baht
- Average cost per unit = 23,600 / 23 = 1,026 baht (rounded)
- Calculate Capital Gain:
- Sale proceeds = 10 units x 1,500 baht = 15,000 baht
- Cost basis = 10 units x 1,026 = 10,260 baht
- Capital gain = 15,000 – 10,260 = 4,740 baht
Case Study One: Observation
In Case Study 1, where the market is volatile, the FIFO method results in a higher capital gain of 5,000 baht, as it applies the earliest (and lowest) purchase prices to the sale. In contrast, the Moving Average Cost method smooths out the purchase costs, yielding a lower capital gain of 4,740 baht. This demonstrates how Moving Average Cost can offer a stabilised cost basis in fluctuating markets, reducing the impact of low initial purchase prices on the taxable gain.
Case Study 2: Rising Market
Purchase History
- January: 10 units at 1,200 baht each.
- March: 5 units at 1,400 baht each.
- June: 10 units at 1,600 baht each.
Sale:
- September: 12 units sold at 1,800 baht each.
FIFO Calculation
Using FIFO, the first 12 units sold match the earliest purchases made in January and March.
- Cost basis:
- 10 units from January at 1,200 baht = 12,000 baht
- 2 units from March at 1,400 baht = 2,800 baht
- Total cost basis = 12,000 + 2,800 = 14,800 baht
- Capital gain:
- Sale proceeds = 12 units x 1,800 baht = 21,600 baht
- Capital gain = 21,600 – 14,800 = 6,800 baht
Moving Average Cost Calculation
With the Moving Average Cost method, the cost per unit is averaged out across all purchases, and this average is used to calculate the cost basis for the sale.
- Calculate Average Cost per Unit:
- After January purchase: Average cost per unit = 1,200 baht
- After March purchase:
- Total units = 15 (10 + 5)
- Total cost = (10 x 1,200) + (5 x 1,400) = 12,000 + 7,000 = 19,000 baht
- Average cost per unit = 19,000 / 15 = 1,267 baht (rounded)
- After June purchase:
- Total units = 25 (15 + 10)
- Total cost = 19,000 + (10 x 1,600) = 19,000 + 16,000 = 35,000 baht
- Average cost per unit = 35,000 / 25 = 1,400 baht
- Calculate Capital Gain:
- Sale proceeds = 12 units x 1,800 baht = 21,600 baht
- Cost basis = 12 units x 1,400 = 16,800 baht
- Capital gain = 21,600 – 16,800 = 4,800 baht
Case Study Two: Observation
In Case Study 2, with a rising market, the FIFO method results in a higher capital gain of 6,800 baht by applying the lower, earlier purchase prices to the sale. Conversely, the Moving Average Cost method provides a stabilised cost basis, resulting in a lower capital gain of 4,800 baht. This illustrates how, in rising markets, FIFO may lead to higher gains due to the application of lower cost bases, while Moving Average Cost offers a more balanced view that smooths out rising purchase prices.
Final Thoughts on Choosing a Method
Calculating capital gains can be complex, particularly when multiple purchases occur over the period the asset is held. Deciding on a method and calculating gains accurately require careful consideration, especially as each approach has distinct tax implications.
Securing professional guidance can simplify the process for accuracy, consistency, and compliance. Expert advice ensures you select the most suitable method and apply it consistently throughout the tax year, helping you optimise your tax outcomes and meet the regulatory requirements.
How We Can Help
Our Assisted and Expert Filing Services include complete support for calculating capital gains and selecting the best method for your tax year. Our experienced team can guide you through each step, ensuring your gains are calculated accurately and your tax filings are fully compliant.
Book a free call with our team today for further support and personalised advice. We’re here to make capital gains reporting straightforward and stress-free.
