Her Majesty’s Revenue and Customs (HMRC) has published guidance for the tax implications of selling and trading cryptocurrencies such as bitcoin, ethereum, and other digital assets. The policy paper, which was last updated in December 2019, goes into detail about how individuals in the United Kingdom should calculate their crypto taxes and which rules apply for calculating the cost basis specifically.
In this article, we will explain everything you need to know about calculating cost basis according to rules for Share Pooling (or Share Identification), the Same-Day rule, and the 30-Day rule (or Bed and Breakfasting) according to UK tax laws by the HMRC. We will do this in detail by using a few practical examples and easily understandable terms.
Capital Gains and Cost Basis
You might have heard the terms capital gains and cost basis being thrown around. While it might sound complicated at first, it is actually pretty straightforward to understand the basics of it.
The general rule is that every time you sell, trade, or purchase any goods or services and pay with a cryptocurrency, you need to calculate the capital gains for that transaction. This is also referred to as the disposal of a crypto asset.
The general formula for calculating capital gains is:
capital gains = selling price – purchase price
The selling price is simply the value of what you sold (disposed of) at the time when you made the transaction. The purchase price is what you originally paid when you acquired the coins earlier and is also referred to as the cost basis. The cost basis should also include any associated costs such as trading fees.
The applicable capital gains tax rate and tax-free allowances depend on a few different factors and will not be covered further in this article.
If you only have a few transactions it will be quite easy to calculate your cost basis, selling price, and resulting capital gains. However, if you have more than 10-20 transactions, it will quickly become very difficult to keep track of the correct cost basis for each disposal of your crypto assets.
A simple method to calculate and keep track of the cost basis is to first find the total average cost of all your holdings, and then simply multiply this value with the number of coins sold or disposed of. This cost basis method is commonly referred to as the Average Cost Basis (ACB) and is also applicable for individuals in the UK, but with a few exceptions which we will explain next.
Share Pooling Rules
It has been common practice in the past to sell shares of a company that is at a loss in order to reduce the total tax liability, and then simply repurchase the same shares back shortly after if the investor wants to maintain exposure to the asset. This is also referred to as wash sale and is actually still allowed in many countries today.
In the UK however, the HMRC has published official rules to avoid individuals selling shares and benefitting from the tax reduction if the same shares are purchased back within a short timeframe.
These rules, often simply referred to as Share Pooling or Share Identification rules, can be broken down into three separate rules:
The Same-Day Rule
If you buy and sell the same asset on the same day, then the cost basis of the disposed asset should be calculated as the average cost of the asset purchased that day. If you have sold more of an asset than you purchased on the same date, then the next rule below should be applied to the remaining amount.
The 30-Day Rule
If you buy back the same asset you have sold within the next 30 days, the cost basis of the disposed asset should be calculated using the FIFO cost basis method. This is also referred to as bed and breakfasting. If you have sold more of an asset than you purchased within the following 30 days, then the next rule below should be applied to the remaining amount.
Section 104 Holding
Calculate the average cost basis for all assets bought prior to the disposal date. To find the cost basis of the asset disposed of, simply multiply the average cost with the number of assets/coins sold (similar to the Average Cost Basis method). The HMRC refers to this as a single pool in your Section 104 holding.
More information and details about Share Pooling rules from the HMRC can be found here.
Even though these rules are fairly specific, it becomes fairly quickly a big challenge if you are trying to calculate the cost basis for hundreds of cryptocurrency transactions while adhering to the rules for Share Identification.
The team behind Coinpanda has developed a very user-friendly and popular crypto tax software that can calculate the cost basis for crypto traders and investors according to Share Identification rules by HMRC for individuals in the UK. You can get started by signing up for free or reading more about how the Coinpanda software works first.
To explain more in detail how to actually calculate the cost basis and resulting capital gains according to the Share Pooling rules, we will look at three basic examples in the next Sections.
Examples
Example 1 – Section 104 Holding
Our fictive British character John has bought bitcoin on three occasions in 2019 and 2020, and then later sold a part of his holdings in 2020. All his transactions can be seen in the below table:
| Tx No. | Type | Date | Amount | Price | Fees | Cost Basis | Capital Gains |
|---|---|---|---|---|---|---|---|
| 1 | Buy | 2019-08-14 | 0.2 BTC | £1,800 | £10 | £1,810 | – |
| 2 | Buy | 2019-10-29 | 0.6 BTC | £4,300 | £20 | £4,320 | – |
| 3 | Buy | 2020-03-14 | 0.3 BTC | £1,350 | – | £1,350 | – |
| 4 | Sell | 2020-06-05 | 0.8 BTC | £6,200 | – | (?) | (?) |
Now, John needs to work out his cost basis and resulting capital gains. Because John did not buy back any bitcoin during the same day he sold, or within the 30 days following, we can calculate the cost basis directly from the Section 104 holding of his total bitcoin pool.
Total amount in pool:
0.2 + 0.6 + 0.3 = 1.1 BTC
Total cost in pool:
1,810 + 4,320 + 1,350 = £7,480
Average cost:
£7,480 / 1.1 BTC = £6,800 per BTC
We find the cost basis for 0.8 BTC sold simply by multiplying the amount with the average cost:
Cost basis:
0.8 BTC * £6,800 = £5,440
The resulting capital gains for John are therefore found as:
Capital gains:
£6,200 – £5,440 = £760
Example 2 – The Same-Day Rule
In this example, we will replace our fictive character John with Emma instead. For simplicity, we will assume Emma has bought and sold bitcoin on the same dates as John, but she did also buy bitcoin on the same date she sold. Emmas transactions can be seen below:
| Tx No. | Type | Date | Amount | Price | Fees | Cost Basis | Capital Gains |
|---|---|---|---|---|---|---|---|
| 1 | Buy | 2019-08-14 | 0.2 BTC | £1,800 | £10 | £1,810 | – |
| 2 | Buy | 2019-10-29 | 0.6 BTC | £4,300 | £20 | £4,320 | – |
| 3 | Buy | 2020-03-14 | 0.3 BTC | £1,350 | – | £1,350 | – |
| 4 | Sell | 2020-06-05 | 0.8 BTC | £6,200 | – | (?) | (?) |
| 5 | Buy | 2020-06-05 | 0.4 BTC | £3,000 | – | £3,000 | – |
Because Emma bought 0.4 BTC on the same date she sold 0.8 BTC, she needs to account for the Same-Day rule when working out her capital gains:
Cost basis 0.4 BTC (Same-Day rule):
£3,000
Cost basis 0.4 BTC (Section 104 holding):
0.4 BTC * £6,800 = £2,720
Total cost basis:
£3,000 + £2,720 = £5,720
The resulting capital gains for Emma are therefore found as:
Capital gains:
£6,200 – £5,720 = £480
We can see that Emma’s capital gains are in fact lower than John’s. This is because the average purchase price (acquisition cost) from 2019/2020 was lower than the purchase price on the date Emma sold 0.8 BTC.
However, if the price of bitcoin was lower on this date compared to the average purchase price, the Same-Day rule would not allow Emma to realize her losses by buying bitcoin back on the same day. As already mentioned, this would be classified as a wash-sale and is the reason why the HMRC has put these rules in place.
Example 3 – The 30-Day Rule
In our last and final example, we will replace our characters John and Emma with Kevin. Kevin has made the same transactions as Emma, but he also bought another 0.2 BTC seven days after selling some of his bitcoin holdings:
| Tx No. | Type | Date | Amount | Price | Fees | Cost Basis | Capital Gains |
|---|---|---|---|---|---|---|---|
| 1 | Buy | 2019-08-14 | 0.2 BTC | £1,800 | £10 | £1,810 | – |
| 2 | Buy | 2019-10-29 | 0.6 BTC | £4,300 | £20 | £4,320 | – |
| 3 | Buy | 2020-03-14 | 0.3 BTC | £1,350 | – | £1,350 | – |
| 4 | Sell | 2020-06-05 | 0.8 BTC | £6,200 | – | (?) | (?) |
| 5 | Buy | 2020-06-05 | 0.4 BTC | £3,000 | – | £3,000 | – |
| 6 | Buy | 2020-06-12 | 0.2 BTC | £1,480 | – | £1,480 | – |
Because Kevin bought 0.4 BTC on the same date he sold 0.8 BTC, he also needs to account for the Same-Day rule when working out his capital gains:
Cost basis 0.4 BTC (Same-Day rule):
£3,000
Kevin also bought 0.2 BTC seven days later, which means he now has to consider the 30-Day/Bed and Breakfasting rule as well:
Cost basis 0.2 BTC (30-Day rule):
£1,480
Cost basis 0.2 BTC (Section 104 holding):
0.2 BTC * £6,800 = £1,360
Total cost basis:
£3,000 + £1,480 + £1,360 = £5,840
The resulting capital gains for Kevin can be found as:
Capital gains:
£6,200 – £5,840 = £360
Conclusion
We have in this article explained how capital gains and cost basis calculations should be done in the UK. We have also looked at how the Same-Day rule and the 30-Day rule must be accounted for together with the Section 104 Holding according to the Policy Paper by the HMRC. In the end, we looked at three practical examples that showed all calculations required for calculating crypto gains in the UK for different scenarios.
It should be clear now that cryptocurrency tax calculations can be quite complicated, but the most important thing to do is to keep track of all the transactions on different exchanges and wallets. Most people that have bought or traded any cryptocurrency chose to use a cryptocurrency tax solution to automate the process of calculating and reporting their capital gains.
Coinpanda is one of very few crypto tax solutions that have full support for UK Share Pooling (Share Identification) rules. This tax solution has in a short time become very popular in the UK and is today used by several thousand individuals to make it simple to calculate and report their crypto taxes. You can easily import all transactions from exchanges like Coinbase and Binance automatically, and generate your crypto tax reports with the click of a button.
You can sign up for a 100% free account here, or view a cryptocurrency sample tax report first.
If you want to learn more about how cryptocurrencies such as bitcoin are taxed in the UK, you can refer to our in-depth tax guide that is updated regularly:
