In the UK, the Bed and Breakfast rule is an essential tax principle that crypto investors need to understand. It plays a critical role in how Capital Gains Tax (CGT) is calculated for cryptoassets, and it can catch out those looking to minimise their tax bills through strategic buying and selling. Whether you’re trading Bitcoin, Ethereum, or other digital assets, you should be aware of the HMRC matching rules and how bed and breakfasting fits in, especially if you’re selling and trading the same cryptoasset within a short time frame.
In this article, we’ll explore what the bed and breakfast rule is, how it applies to cryptocurrency and why it’s essential for you to consider when managing crypto tax obligations.
What is the Bed and Breakfast Rule for capital gains?
The bed and breakfast rule is designed to prevent tax avoidance through wash sales, where an investor sells an asset and buys it back within a short period to realise a tax benefit.
The rule was originally designed with traditional finance assets in mind like stocks and shares. As HMRC treats cryptocurrency the same for capital gains tax purposes, the same rules apply, but because of the volatile nature of crypto and volume of transactions this can become complex.
The bed and breakfasting rule comes into play when you dispose of an asset and repurchase the same asset within 30 days. In crypto, if you sell and then buy back the same cryptocurrency within 30 days, any gains or losses are calculated based on the price at which you repurchase the crypto rather than the original acquisition cost.
HMRC match the sale to the repurchase instead of allowing you to defer the gains into your pooled cost (known as the S104 pool), preventing you from realising an artificial loss (which could be used to reduce tax liabilities) while effectively retaining the asset.
HMRC pooling and matching rules
HMRC uses a concept called pooling for calculating CGT on property like shares, and this also applies to cryptoassets. Rather than tracking the cost of every acquisition individually, all purchases of the same asset are pooled together to form a single allowable cost.
Each asset has its own Section 104 pool. This means every time you acquire a cryptoasset, its fair market value at the time of receipt, contributes to the average cost of your section 104 pool.
When you dispose of an asset, the capital gain or loss for tax purposes is the difference in value between the proceeds and acquisition cost.
HMRC Matching Rules
When calculating CGT after disposing of a cryptoasset, you can't rely solely on the asset's pooled cost (the Section 104 pool). You must apply HMRC's matching rules to determine the correct acquisition cost. These rules decide the order in which your crypto sales are matched with previous acquisitions:
- Same day rule: the crypto sold is matched with purchases made on the same day.
- Bed and breakfast rule: crypto sold is matched with any purchases made within the next 30 days.
- S104 pool: Finally, any remaining sales are matched to assets held in the S104 pool, which contains all earlier purchases.
Tax loss harvesting
Tax loss harvesting, a strategy used to sell assets at a loss to offset gains elsewhere, can be an effective way to reduce your tax bill. However, the Bed and Breakfast rule complicates this for crypto investors.
Why is tax loss harvesting tricky with crypto and the bed and breakfast rule?
When trying to reduce your tax bill by implementing a tax loss harvesting strategy, it's important to consider the HMRC bed and breakfast rules so that you do not impact the tax position.
HMRC’s “bed and breakfasting rule” prevents individuals purchasing and selling assets in a short period of time in order to manipulate gains and losses. Without the rule you would be able to sell assets at a loss, reduce your tax liability and immediately repurchase the same asset. The bed and breakfast rule ensures that if you sell an asset and rebuy it within 30 days, the gain or loss is still realised based on the original cost of the asset as the new acquisition cost is deducted in calculating the gain, rather than the S104 pool cost.
Example of Bed and Breakfasting with Bitcoin
Let’s look at a simplified example to illustrate:
- Day 1: You buy 1 Bitcoin for £20,000.
- Day 10: You sell that Bitcoin for £18,000 (realising a loss of £2,000).
- Day 15: You buy 1 Bitcoin back for £19,000.
In this case, under the bed and breakfast CGT rule, the sale on Day 10 is matched with the repurchase on Day 15, not with the earlier £20,000 purchase. This means that your loss is reduced because your acquisition cost for the repurchased Bitcoin is considered at £19,000 instead of £20,000.
For a more detailed look at how tax loss harvesting works, as well as a list of the risks, take a look at our crypto tax loss harvesting blog.
Are you selling crypto ahead of the Autumn Budget 2024?
We’re expecting the government to announce big changes to capital gains tax as part of the 2024 Autumn Budget. If you plan on selling ahead of the budget, then remember HMRC’s bed and breakfasting rules:
- If you reacquire the same token within 30 days of your disposal, this becomes the cost basis for the CGT calculation.
- The bed and breakfast rule applies to all types of acquisitions, not just purchases so don’t overlook rewards or other income you may receive in the same token during the 30 day period.
🔥 If the budget is announced and you regret selling, you could use the bed and breakfast rule to your advantage by buying back within 30 days. Just remember, crypto is volatile, so prices may work in - or against - your favour, both in terms of the value of your investment and tax liability!
Conclusion - how can Recap help?
Let’s be honest - crypto tax can be confusing, especially when it involves rules like bed and breakfasting, which were originally designed for traditional investments. The fast pace and sheer volume of transactions in crypto make applying these rules even trickier.
As the only UK-based crypto tax calculator and built specifically to comply with HMRC tax rules, like share pooling and bed and breakfasting, we’re here to make things easier. Our software takes the headache out of tracking your transactions, keeping on top of cost basis and ensures your capital gains are calculated accurately, keeping you compliant with UK tax laws. Instead of getting bogged down in the details, you can let Recap do the heavy lifting - leaving you more time to focus on your investments.
