Average cost basis method: pooling explained

What the average cost basis method means

When you use the average cost basis method, every unit of the same asset you own gets grouped into one pool, and the cost per unit becomes a straightforward average. If you buy another unit, the combined cost goes up. Selling takes a slice out at that average, then you calculate the gain from the difference between your sale price and the average cost.

This isn't how first-in, first-out works, where each sale is linked directly to particular older purchases. Pooling stays less complicated if you're making frequent trades, so some countries make it the rule for certain asset types. The full cost is unchanged whichever method you pick; it just gets split up differently for each sale.

How UK section 104 pooling and French averaging work

In the UK, anything called a section 104 pool refers to rules in capital gains law that group all your shares of one type together. HM Revenue and Customs (HMRC) also treats cryptoassets this way. But before touching the pool, HMRC matches sales to any purchases you made the same day, then those made during the following 30 days. Units left after that come from the pool at the running average cost.

France does something similar for certain securities and digital assets: each purchase recalculates a weighted average cost for all units owned. You'll see that the idea matches up, though forms and details aren't aligned, so don't apply UK methods in France without checking official practice.

Worked example: a pooled average cost

Let's say you start by buying one unit for 1,000, then add another at 2,000 later on. Now, the pool has two units with a total cost of 3,000, so each unit averages out to 1,500. Next, you sell a unit for 2,500. You use the average cost of 1,500, which means your gain on the sale is 1,000.

If you were using first-in, first-out instead, that sale would match to your original 1,000 purchase and show a gain of 1,500. The cash in your hands is the same, but the way you report gains changes with the method.

Frequently asked questions

Do I have to use the average cost method?

This comes down to local tax law. Some countries insist on pooling or averaging for certain holdings, while others give you a choice between that, first-in, first-out, or direct identification. Where you do have a choice, stick with one approach for consistency, and hold onto your records. Always check with your tax authority or a specialist before switching your method.

Do 30-day matching rules apply to crypto?

In the UK, HMRC applies matching rules to cryptoassets that work much like the share 30-day rules do, so any repurchases inside 30 days after a sale might get matched before you use the pool. Other countries have their own requirements, or sometimes none for crypto at all. Rules move over time, so always check the most recent information with your tax office, and see wash sale rules for background on the concept.