The Government of UK, also called the HM Revenue and Customs (HMRC) recognises crypto as an asset which means individuals need to pay capital gains taxes on any profit made on its disposal. To do this, HMRC has defined clear guidelines on how to calculate your crypto taxes in the UK.

One of the methods prescribed by HMRC is the share pooling method, officially known as the Section 104 Rule, offering a structured approach to determining crypto taxes.

In this article, we’ll discuss the laws set by HMRC for calculating your capital gains including Share Pooling, Same Day rule, and 30 Day rule. 

What is Share Pooling?

Share pooling, also called share matching, is a UK-specific cost-basis method defined by HMRC to calculate crypto taxes for similar tokens. Instead of calculating the capital gain or loss for individual transactions, the same type of crypto is kept in a ‘pool’ (or section 104 pool).

The cost basis for each crypto token acquired at different points of time goes into the pool to create the ‘pooled allowable cost’. This is used to calculate the capital gains or losses when you sell some of the assets in the pool.

Please note that the HMRC describes NFTs as “separately identifiable” so they are not pooled.

How To Calculate Capital Gains Using Share Pooling Rules?

To determine crypto taxes using a share pooling cost basis, you need to consider the following three rules.

• The Same Day Rule
• The 30 Day Rule, also called Bed and Breakfasting Rule
• Section 104 Holding

The Same Day Rule

When you dispose and acquire tokens on the same day, you will use the average cost basis of all the tokens purchased on that day and the average sale price to calculate your capital gains or loss.

• All the acquired tokens are treated in a single transaction
• All the token disposals are treated in a single transaction

Your cost basis is the average price of all the crypto purchases you make on the same day. The acquired tokens are matched with the disposed of quantity as much as possible to avoid sending them into the section 104 pool.

If the disposed of tokens exceeds the acquired quantity, the excess tokens will be considered for the second rule – the 30 day rule.

Let’s consider an example to understand this better:

Noah acquired 1.2 bitcoin for £7000 in November 2019 and 0.3 bitcoin for £2300 in April 2020.

It is considered that Noah has a single section 104 holding of (1.2+0.3) = 1.5 bitcoin and a total allowable cost of £9300 for the pool.

Average cost basis: 9300/1.5 = £6200/ bitcoin

Now, Noah sells 0.5 bitcoin for £5000 in October 2022. He buys back 0.3 bitcoin on the same day for £2900. Here, the Same Day rule gets applied.

The acquired tokens are matched with the disposed-of quantity first and then applied to the shared pool.

Cost basis (of acquired tokens falling under same day rule): £2900

Cost basis (of remaining disposed of tokens): 0.2 * 6200: £1240

Total cost basis (considered for calculating capital gain or loss): £ (2900+ 1240) = £4140

So, the capital gains realized (Selling price - cost basis): £ (5000 - 4140) = £860

The 30 Day Rule (or, Bed and Breakfasting Rule)

When you dispose of tokens and then acquire the same type within the next 30 days, you will calculate the cost basis of the disposed of tokens using the FIFO method and not using the cost basis from the s104 pool. This is also called the ‘bed and breakfasting’ rule.

This rule prevents investors from using the crypto ‘wash sale’ – where the crypto is sold at a lower price to realize a capital loss but is repurchased to maintain the asset quantity while avoiding taxes.

If the disposal quantity is more than the number of acquired tokens within 30 days, the remaining assets are considered in the Section 104 rule.

Let’s use the above example of Noah to understand this:

Noah purchases 1.2 bitcoin for £7000 in November 2019 and 0.3 bitcoin for £2300 in April 2020.

So, Noah has a single section 104 holding of (1.2+0.3) = 1.5 bitcoin and a total allowable cost of £9300 for the pool.

Average cost basis: 9300/1.5 = £6200/ bitcoin

Now, Noah sells 0.5 bitcoin for £5000 in October 2022. He buys back 0.3 bitcoin on the same day for £2900. Here, the Same Day rule gets applied.

The acquired tokens are matched with the disposal quantity before sending the excess to the 30-day rule or the section 104 pool, whichever is applicable.

Cost basis (of acquired tokens falling under same day rule): £2900

However, he also purchases 0.1 bitcoin for £850 10 days later. This transaction falls under the 30 day rule.

Cost basis (of acquired tokens falling under 30 day rule): £850

Cost basis ( of remaining 0.1 bitcoin falling under s104 pool): (0.1 * 6200) = £620

Total cost basis: (2900+850+620) = £4370

So, the capital gains earned by Noah: (5000 - 4370) = £630

Section 104 Rule

Under this rule, you should calculate the cost basis of a given pool of assets using the average cost basis method. It is then used to calculate your capital gains or losses.

• To calculate the average cost basis of the pooled assets, find out the total cost basis of all the crypto before disposal and divide it by the number of the assets
• To calculate your sale price, multiply the average cost basis by the number of disposed of crypto
• Use it to calculate your capital gain or loss for the given crypto pool

The s104 pool is the total of all the crypto assets that don’t fall under the same day or 30 day rule. The same crypto assets are considered to be in the same pool.

Summarising The Share Pooling Process

Here’s the step-by-step process as defined by HMRC:

• If you dispose of crypto and then buy it back, in the same quantity, within the next 30 days, then the same-day rule is applied first if applicable

• The remaining acquired tokens to which the 30-day rule applies are matched to the disposed of tokens and don’t go into the s104 pool

• If the quantity of tokens acquired exceeds the disposed of quantity in the next 30 days, the excess goes into the section 104 pool.

Preventing Crypto Wash Sales

One of the challenges faced by tax authorities is the potential manipulation of average cost basis, known as crypto wash sales. Investors might purposefully buy assets at lower prices to reduce their average cost basis artificially. 

To counter this, HMRC has laid out specific cost basis rules, including the Same Day Rule, Bed and Breakfasting Rule, and finally, the Section 104 Rule, to ensure fair and accurate taxation. These rules offer a clear framework for calculating crypto taxes and help maintain transparency in the market.

How Kryptos Can Help Calculate Your UK Crypto Taxes

While the above-stated rules look straightforward, keeping track of multiple transactions for different asset pools can quickly turn complicated.

Our crypto tax calculator automatically does this all for you in a matter of minutes.

All you need to do is:

• Go to the settings and choose your base currency, country and cost basis method.

• Import your transactions and let Kryptos do the calculations for you

• You can view and manage your portfolio to gain better clarity on your tax position, and generate UK-specific reports that comply with HMRC rules.

To learn more, Sign Up on Kryptos for free now.

FAQs

1. What is share pooling in crypto taxation?

Share pooling, also known as the Section 104 Rule, is a method defined by HMRC for calculating crypto gains and losses in the UK. It involves grouping identical assets together and calculating the average cost basis for each pool, which is then used to determine capital gains or losses.

2. How does the Same Day Rule work?

The Same Day Rule applies when you buy and sell the same cryptocurrency on the same day. All tokens bought and sold within the same day are treated as a single transaction. The average cost basis for that day is used to calculate your gains or losses.

3. What is the Bed and Breakfasting Rule?

The Bed and Breakfasting Rule, or the CGT 30-day rule, comes into play when you sell tokens and then repurchase the same kind of tokens within 30 days. The cost basis of the repurchased tokens within 30 days is used to calculate gains or losses.

4. How does the Section 104 Rule function in share pooling?

The Section 104 Rule mandates using the average cost basis method for a given pool of assets. Total cost basis of the assets in the pool is divided by the total number of coins or tokens in that pool to calculate the average cost basis. Subsequent gains or losses are determined using this figure.

5. What is the purpose of share pooling in crypto taxation?

Share pooling simplifies the calculation of capital gains and losses for crypto assets in the UK. By averaging the cost basis for similar assets, it provides a fair and consistent method for investors to report their gains or losses to HMRC.

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