HMRC Section 104 Pooling Method for Crypto Held Across Multiple Wallets

TL;DR for UK Taxpayers: - Pooling by Asset Type: HMRC treats all holdings of the same cryptocurrency (e.g., BTC, ETH) as one combined “pool” regardless of how many wallets you use. - Wallet Location Irrelevant: Separate wallets don’t affect your tax calculation. You must combine the costs and amounts across all wallets to calculate your average cost basis. - Average Cost Basis: When you sell crypto, your taxable gain or loss is calculated from the average cost per token from this combined pool. - Internal Transfers Tax-Free: Moving crypto between your own wallets does not trigger a taxable event. - Matching Rules Apply Globally: Same-day and 30-day “bed and breakfasting” rules apply across all wallets, not individually.

The UK’s tax authority, HM Revenue & Customs (HMRC), mandates the use of the Section 104 pooling method for calculating capital gains and losses on cryptocurrency holdings. This framework simplifies tax reporting by aggregating identical cryptoassets into a single pool, irrespective of their storage across multiple wallets. Below, we analyze the mechanics of this system, its application to multi-wallet scenarios, and compliance requirements for taxpayers.

Core Principles of Section 104 Pooling

1. Asset Type Determines Pooling, Not Storage Location

Under HMRC rules, cryptoassets are pooled by type, not by wallet. For example:

• Bitcoin held in Wallet A and Wallet B merges into a single BTC pool.
• Ether in Wallet C and Wallet D forms a separate ETH pool.

This principle, confirmed in HMRC’s Cryptoassets Manual, ensures that “each type of token will need its own pool”. Physical separation of assets into distinct wallets does not alter their tax treatment.

2. Pooled Allowable Cost Calculation

The pooled allowable cost is the sum of all acquisition costs for a given cryptoasset type, divided by the total units held. For instance:

• Wallet A: 2 BTC purchased for £40,000.
• Wallet B: 1 BTC purchased for £25,000.
• Total pool: 3 BTC with £65,000 allowable cost (£21,666.67 per BTC).

Disposals draw from this average cost, regardless of which wallet originally held the assets.

Multi-Wallet Transactions and Tax Implications

1. Tax-Free Wallet Transfers

Moving crypto between personal wallets does not trigger capital gains tax. HMRC views such transfers as internal reorganizations rather than disposals. For example:

• Transferring 0.5 BTC from Wallet A to Wallet B updates the BTC wallets’s total units but retains the same average cost basis.

2. Disposal Matching Rules Across Wallets

When selling crypto, HMRC applies matching rules globally across all wallets:

a. Same-Day Rule

Disposals first match acquisitions made the same day, even if transactions occurred in different wallets.

• Example: Selling 1 BTC on 12 March after buying 1 BTC the same day in another wallet uses the same-day acquisition cost.

b. 30-Day (Bed and Breakfasting) Rule

Unmatched disposals pair with purchases within the next 30 days.

• Example: Selling 2 ETH on 1 April matches ETH bought on 15 April in a separate wallet, using the later purchase’s cost basis.

c. Section 104 Pool

Remaining disposals use the pooled average cost.

• Example: Selling 3 BTC after exhausting same-day/30-day matches deducts costs from the BTC pool’s average (£21,666.67 per BTC in the earlier example).

Non-Fungible Tokens (NFTs)

NFTs are excluded from pooling due to their uniqueness. Each NFT is a standalone asset with its own cost basis.