Crypto cost basis: what is it & how to calculate it

UK TAXSOFTWARE
6 min read
First published:
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Sam Adams
Written by
Sam Adams,
Head of Content

When calculating your crypto taxes one of the most important things to understand is the cost basis of your crypto assets. In order to accurately calculate your capital gains and losses, you need to know how to work out your cost basis, which may also be referred to as allowable costs. Unfortunately, keeping track of your cost basis can be difficult for crypto investors, especially if you own multiple kinds of the same asset, have made lots of transactions or frequently move your assets between different exchanges and wallets.

In this article, we’ll explain what cost basis is, take a look at different cost basis methods, and find out how to calculate your cost basis in the UK. We will also delve into the matching rules in detail to understand when to apply 'same day', 'bed and breakfast', or 'section 104 pool' rules.

What is crypto cost basis?

Crypto cost basis, also referred to as allowable costs, is the price you originally paid for your crypto asset, including any transaction fees and commissions and is essential for accurately calculating your tax liability in the UK.

In the UK, HMRC has specific rules for cost basis known as the share pooling method. Different rules apply depending on whether you already own the same crypto asset and when it was acquired, to ensure that gains and losses cannot be manipulated. Understanding the cost basis is crucial for crypto investors, especially when it comes to taxation, because to calculate your capital gain you subtract the cost basis from the disposal proceeds (the price you sold your asset for).

Why is calculating the cost basis of your crypto assets challenging?

Although cost basis seems like a simple concept, it can be challenging for crypto investors to keep track of due to several factors:

  • Price volatility of crypto
    The volatility and fluctuating price of crypto make it hard to determine the cost basis of an asset at a particular time.
  • Volume of crypto transactions
    It’s likely you’ll have acquisitions of the same asset but at different prices, times, from different places and movement between different exchanges and wallets. Keeping track of all these transactions accurately with the correct cost basis is challenging. Moreover, there are no standard reporting methods for exchanges, leading to varying data formats and potential gaps in information. HMRC is clear that record keeping is the responsibility of the individual.
  • Different cost basis methods
    There are many different cost basis methods and rules depending on your tax jurisdiction. Navigating these and understanding which approach is correct can be really confusing!

What is average cost basis (ACB)?

The Average Cost Basis (ACB) is a simple method for calculating cost basis that results in an average price, you simply divide the total cost of your assets by the total number you are holding. For example if you have 10 ETH bought at different times, add up all your different purchase costs then divide by 10 to find the average cost of 1 of your Ethereum tokens.

Some countries use average cost basis to calculate the capital gains on crypto but most of these countries also incorporate their own additional rules to prevent crypto investors taking advantage of wash sale capital losses. For example, Canada uses the Adjusted Cost Basis Method and France uses the Weighted Average Acquisition Price. The UK uses a concept called the Share Pooling method to prevent investors purchasing and selling assets in a short period of time to manipulate gains and losses. We explore how this works in detail below.

Using the pooling method to calculate crypto cost basis in the UK

HMRC are clear that UK taxpayers must use the Section 104 (S104) pooling method to establish their crypto cost basis and calculate their crypto gains and losses.

The pooling method identifies which crypto asset has been sold and prevents individuals purchasing and selling assets in a short period of time in order to manipulate gains and losses, which is known as a wash sale.

The matching rules

To work out your cost basis you should follow the ‘matching rules’ as set out below, this determines the order in which crypto assets are deemed to have been sold.

On the disposal of crypto assets, they are first matched with acquisitions:

  1. made on the same day (same day rule), then
  2. made in the next 30 days; on a first-in first-out basis (bed and breakfasting rule), then
  3. Section 104 pool - the rest of the acquisitions are aggregated in the S104 pool, creating a pro-rata ‘average cost’ per token in the pool.

Same day rule

When disposing of a crypto asset acquired on the same day, then the same day rule applies to the cost basis.

Example: Same day rule

Martyn holds 5,000 token B in a section 104 pool. He spent a total of £500 acquiring them, which is his pooled allowable cost.

On 23 June Martyn makes the following transactions:

  • Morning – he disposes of 1,000 token B for £800
  • Afternoon – he acquires 1,600 token B for £1,000
  • Evening – he disposes of 500 token B for £600

As Martyn’s disposals both take place on the same day, they are treated as a single disposal of 1,500 token B for £1,400.

Because Martyn made an acquisition of token B on the same day, this is matched with the disposal and used for his cost basis.

Martyn will need to work out the gain on his disposal of 1,500 token B as follows:

Disposal proceeds£800 + £600£1,400
Less allowable costs£1,000 x (1,500 / 1,600)£938
Gain£462

The remaining 100 token B, and their associated cost of £62 (£1,000 x (100 / 1,600)) will go into the section 104 pool. The section 104 pool now contains 5,100 token B and total pooled costs of £562:

DateQuantity of token BPooled allowable costs
Opening balance5,000£500
23/06+100+£62
Closing balance5,100£562

Bed and breakfasting rule

The Bed and Breakfasting rule, also known as the 30-day rule, applies when the disposal cannot be matched with acquisitions on the same day. If any acquisitions are made in the next 30 days, then that becomes the cost basis for the capital gains calculation, based on a first-in first-out basis.

Example: Bed and breakfasting (30-day) rule

Rachel holds 2,000 token C in a section 104 pool. She spent a total of £1,000 to acquire them, which is her pooled allowable cost.

Rachel makes the following transactions:

  • On 31 March Rachel disposes of 1,000 token C for £400
  • On 20 April Rachel disposes of 500 token C for £150
  • On 21 April Rachel acquires 700 token C for £175
  • On 28 April Rachel acquires 500 token C for £100
  • On 1 May Rachel acquires 500 token C for £150

The same day rule does not apply here, so next we look at the bed and breakfast rule. Acquisitions within 30 days of a disposal are matched on the basis of the earliest acquisition being matched to a disposal.

The acquisitions on 21 April and 28 April take place within 30 days of the disposal on 31 March. and are matched as far as possible. The acquisitions on 28 April and 1 May take place within 30 days of the disposal on 20 April and are matched to the disposal on 20 April as far as is possible.

Rachel will need to work out the gain on her two disposals as follows:

31 March: disposal of 1,000 token C for £400

Disposal Proceeds£400
Less allowable costs 700 token C (21/04)£175
Less allowable costs 300 token C (28/04)£100 x (300 / 500)£60
Gain£165


20 April: disposal of 500 token C for £150

Disposals Proceeds£150
Less allowable costs 200 token C (28/04)£100 x (200 / 500)-£40
Less allowable costs 300 token C (01/05)£150 x (300 / 500)-£90
Gain£20

The remaining 200 token C and their associated cost of £60 (£150 x (200 / 500)) will go into the section 104 pool. The section 104 pool now contain 2,200 token C and total pooled costs of £1,060:

DateQuantity of token CPooled allowable costs
Opening balance2,000£1,000
01/05+200+£60
Closing balance2,200£1,060

Section 104 rule

When the same day rule and bed and breakfast rule do not apply the cost basis is determined by the S104 rule.

There is a S104 pool for each type of crypto asset token held. When assets are held for longer than 30 days they will be added into a S104 pool. An average cost for the crypto assets in the pool is maintained and when a disposal of the crypto asset is made this establishes the cost basis of the asset for the capital gains calculation.

Example: Section 104 pool

Victoria bought 100 token A for £1,000. On 18 September Victoria bought a further 50 token A for £125,000. Victoria is treated as having a section 104 pool of 150 of token A with total allowable costs of £126,000:

Date Quantity of token A Pooled allowable costs
Opening balance100 £1,000
18/09 +50 +£125,000
Closing balance150 £126,000

On 1 December Victoria sells 50 of her token A for £300,000. Victoria will be allowed to deduct a proportion of the pooled allowable costs when working out her gain:

Disposal proceeds £300,000
Less allowable costs£126,000 x (50 / 150)£42,000
Gain £258,000

Victoria has a gain of £258,000 subject to Capital Gains Tax. She has 100 token A remaining in the section 104 pool with total allowable costs of £84,000:

DateQuantity of token APooled allowable costs
Opening balance150£126,000
01/12-50-£42,000
Closing balance100£84,000

What happens when more than one of the matching rules comes into play?

Sometimes more than one rule may come into play, we have highlighted this using the example below.

Example: Interaction of same day rule, 30 day rule and section 104 pool

Gulferaz holds 100,000 token F in a section 104 pool and spent a total of £300,000 acquiring them, which is his pooled allowable cost.

Gulferaz makes the following transactions:

  • 31 July – acquisition of 10,000 token F for £45,000.
  • 31 July – disposal of 30,000 token F for £150,000
  • 5 August – disposal of 20,000 token F for £100,000
  • 6 August – acquisition of 50,000 token F for £225,000
  • 7 August – disposal of 100,000 token F for £150,000

Gulferaz’s acquisition on 31 July takes place on the same day as the 31 July disposal so those transactions are matched as far as possible (10,000 token F).

The remaining tokens for this disposal (20,000 token F) can be matched with Gulferaz’s acquisition on 6 August 20 which takes place within 30 days of the disposal.

Gulferaz’s disposal of 20,000 token F on 5 August, takes place within 30 days of the 6th August acquisition so they are also matched.

The remaining 10,000 token F acquired on 6 August goes into the section 104 pool.

Gulferaz will need to work out his gains/losses on the three disposals as follows:

31 July: disposal of 30,000 token F for £150,000

Disposal proceeds £150,000
Less allowable costs (same day) 10,000 token F £45,000
Less allowable costs (30 day) 20,000 token F (06/08) £225,000 x (20,000 / 50,000) £90,000
Gain£15,000

5 August: disposal of 20,000 token F for £100,000

Disposal proceeds £100,000
Less allowable costs (30 day) 20,000 token F (06/08) £225,000 x (20,000 / 50,000) £90,000
Gain £10,000

6 August: pool change

The remaining 10,000 token F from this acquisition and their associated cost of £45,000 (£225,000 x (10,000 / 50,000) go into the section 104 pool, which is changed as follows:

DateQuantity of token FPooled allowable costs
Opening balance100,000£300,000
06/08+10,000+£45,000
Closing balance110,000£345,000

7 August: disposal of 100,000 token F for £150,000

Disposal proceeds£150,000
Less allowable costs (S104 pool)£345,000 x (100,000 / 110,000)£313,637
Loss£163,637

The section 104 pool is changed as follows:

Date Quantity of token F Pooled allowable costs
Opening balance 110,000 £345,000
07/08 -100,000 -£313,637
Closing balance 10,000 £31,363

Using a crypto cost basis calculator

Working out your cost basis is complicated and time-consuming especially for crypto investors with lots of transactions. This is where specialised software like Recap becomes invaluable. Recap tracks all of your transactions across your connected exchanges and wallets automatically identifying your cost basis and calculating your capital gains position from crypto.

Benefits of using crypto tax software

Using crypto tax software like Recap offers several advantages:

  • Automatically track all of your transactions: the software automatically logs all your crypto transactions, saving you the effort of manual record-keeping.
  • Record keeping done for you and backed up: Recap securely stores your transaction data, ensuring it is safely backed up.
  • No need to understand matching rules: the software handles the complex matching rules, accurately identifying your cost basis for each transaction.
  • Ensures accuracy: by automating the process, the risk of manual errors is minimised, ensuring accurate calculations for your tax liability.
  • Peace of mind that you are filing an accurate tax return: crypto tax software gives you confidence that your tax return is precise and in line with HMRC regulations.






Crypto cost basis FAQs

Which cost basis method should you use for your crypto in the UK?

In the UK, you should follow the matching rules to understand whether to apply the same day rule, bed and breakfast (30 day) rule or section 104 rule for your cost basis.

Are fees included in your cost basis?

Yes, cost basis, also referred to as allowable costs, includes all expenses related to when you acquired the crypto asset. It is made up of the price you paid plus any fees like transaction or gas fees.

How do I find the cost basis for an airdrop?

The cost basis of an airdrop could be either the fair market value of the asset at the time of receipt or Nil, depending on how the airdrop was received. Take a look at our article "Crypto airdrops: how are they taxed" for clarity.

How do I calculate the cost basis for a crypto to crypto trade?

The cost basis is the fair market value of the crypto asset at the time of the trade. For example if you traded Bitcoin for Ethereum the cost basis of the ETH would be the FMV of the Bitcoin at the time of the trade.

What is the cost basis for a gift of crypto?

If you have received crypto as a gift your cost basis is the fair market value of the asset on the date of receipt. However if the gift is from your spouse or civil partner then you inherit their original acquisition cost. It's advisable to keep a record of the fair market value at the time of receipt and the gifter's original cost basis just in case.

Can I find the cost basis for my crypto through my exchange?

No, although it depends on the exchange, not many crypto exchanges keep a record of your cost basis. Keeping a spreadsheet of your cost basis can become tedious so we recommend using a crypto tax calculator like Recap to automatically keep track of the cost basis for all of your transactions.

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