Crypto Taxes in the UK:
Share Pooling (HMRC) Explained

by William Carlsen · Updated Sep. 14, 2020

Her Majesty’s Revenue and Customs (HMRC) has published guidance for the tax implications of selling and trading cryptocurrencies such as Bitcoin and Ethereum and other digital assets. The policy paper, which was last updated on December 20, 2019, goes into detail how individuals in the United Kingdom should calculate their crypto taxes and which rules apply for calculating the cost basis.

In this article, we will explain everything you need to know about calculating cost basis according to rules for pooling, the same-day rule, and the 30-day rule as set out by the HMRC. We will do this in detail by using a few practical examples and easily understandable terms.

Read this article to learn about:

What exactly is pooling according to HMRC?

What the same-day and 30-day rule is

Practical examples & calculations

How to report your crypto taxes in the UK

What is 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 straight forward to understand.

The general rule is that every time you sell, trade, or purchase any goods or services 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 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 by HMRC

It has been common practice in the past to sell shares that are at a loss in order to reduce the total tax liability, and then simply repurchase the same shares back shortly after. 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 reduction in taxes if the same shares are purchased back within a short timeframe.

These rules, often simply referred to as Share Pooling rules, can be summarized as the following:

Rule 1: 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 the same day. This is also referred to as the same-day rule. If you have sold more of an asset than you purchased on the same date, then the next rule below should be applied for the remaining amount.

Rule 2: 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 FIFO cost basis method. This is also referred to as the 30-day rule. If you have sold more of an asset than you purchased within the following 30 days, then the next rule below should be applied for the remaining amount.

Rule 3: calculate the average cost basis for all assets bought prior to the disposal date. To find the cost basis of the remaining assets, simply multiply the average cost with the number of assets/coins sold (ACB cost basis).

More information and details about these rules from the HMRC can be found here.

Even though these rules are fairly easy to understand, it becomes a big challenge relatively quickly if you are trying to calculate the cost basis for hundreds of cryptocurrency transactions while adhering to all three rules.

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 Pooling rules by HMRC for individuals in the UK. You can get started by signing up for free here or read more about how the Coinpanda software works.

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.

Example 1: Share Pooling (ACB)

Our fictive character John has bought Bitcoin on three occasions in 2019 and 2020 and then sold part of his holdings later in 2020. All his transactions can be seen in the below table:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC£1,800£10£1,810
2Buy2019-10-290.6 BTC£4,300£20£4,320
3Buy2020-03-140.3 BTC£1,350£1,350
4Sell2020-06-050.8 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 using ACB 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 is 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.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC£1,800£10£1,810
2Buy2019-10-290.6 BTC£4,300£20£4,320
3Buy2020-03-140.3 BTC£1,350£1,350
4Sell2020-06-050.8 BTC£6,200(?)(?)
5Buy2020-06-050.4 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 (ACB):

0.4 BTC * £6,800 = £2,720


Total cost basis:

£3,000 + £2,720 = £5,720

The resulting capital gains for Emma is 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 and later bought back 0.4 BTC.

However, if the price of Bitcoin was lower on this date than 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 behind 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 fictive 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.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC£1,800£10£1,810
2Buy2019-10-290.6 BTC£4,300£20£4,320
3Buy2020-03-140.3 BTC£1,350£1,350
4Sell2020-06-050.8 BTC£6,200(?)(?)
5Buy2020-06-050.4 BTC£3,000£3,000
6Buy2020-06-120.2 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 rule as well:

Cost basis 0.2 BTC (30-day rule):

£1,480


Cost basis 0.2 BTC (ACB):

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 30-day rule must be accounted for together with the Average Cost Basis according to the Policy Paper by the HMRC. In the end, we looked at three practical examples that showed all calculations required for working out your crypto tax gains according to Share Pooling rules in the UK.

It should be clear now that cryptocurrency tax calculations can be quite complicated, but the most important thing to do is keeping track of all your transactions on different exchanges. Most people that have bought 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 Share Pooling rules. This tax solution has in a short time become very popular in the UK and is used today by several thousand individuals to make calculating and reporting crypto taxes quick, easy, and affordable. 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:

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.


About Coinpanda

Coinpanda was founded in 2018 by a team of cryptocurrency and blockchain enthusiasts. It is currently the fastest growing cryptocurrency tax solution and aims to make tax reporting both easy, quick and affordable. More than 2000+ investors and traders use Coinpanda today to calculate their crypto taxes and generate ready-to-file tax reports.

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