FIFO vs LIFO: Why the UK Uses Section 104 Pooling for Crypto Taxes

Overview

If you’ve looked into crypto tax tools, you’ve probably seen terms like FIFO, LIFO, and HIFO.
These accounting methods are common globally — but most of them are not allowed in the UK.

HMRC requires UK traders to use Section 104 pooling, a specific cost-basis method originally designed for shares and now applied to crypto.

Understanding this rule is critical. Using the wrong method can result in incorrect tax calculations and potential penalties.

What Is FIFO?

FIFO (First In, First Out) assumes that the first crypto you buy is the first crypto you sell.

Example:

Buy 1 BTC at £10,000
Buy 1 BTC at £20,000
Sell 1 BTC at £25,000

Under FIFO, the gain is calculated using the £10,000 purchase:

Gain = £25,000 – £10,000 = £15,000

FIFO is simple and widely used in countries like the US — but not in the UK.

What Is LIFO?

LIFO (Last In, First Out) assumes the most recent purchase is sold first.

Using the same example:

The £20,000 BTC is treated as sold

Gain = £25,000 – £20,000 = £5,000

LIFO often results in lower taxable gains during rising markets, which is why some traders prefer it.

However, LIFO is explicitly not permitted by HMRC.

Why FIFO and LIFO Are Not Allowed in the UK

HMRC treats crypto assets like shares, not inventory.
For shares, the UK has long required Section 104 pooling to prevent selective tax optimisation.

Allowing FIFO or LIFO would let traders choose whichever method minimizes tax each year — something HMRC does not permit.

Instead, all identical tokens must be pooled together.

What Is Section 104 Pooling?

Section 104 pooling works by averaging the cost of all identical tokens you own.

Instead of tracking individual purchases, HMRC treats them as one pooled holding.

Example

You buy:

1 ETH at £1,000
1 ETH at £2,000

Your Section 104 pool:

Total ETH: 2
Total cost: £3,000
Average cost per ETH: £1,500

If you sell 1 ETH at £2,500:

Gain = £2,500 – £1,500 = £1,000

This method applies regardless of which ETH you think you sold.

Special UK Rules: Same-Day and 30-Day Rules

Before pooling applies, HMRC enforces two matching rules:

Same-Day Rule
Buys and sells on the same day are matched first.
30-Day Rule (Bed and Breakfasting)
If you repurchase the same token within 30 days of selling, that purchase is matched before the pool.

Only after these rules does Section 104 pooling apply.

These rules make manual calculations extremely complex for active traders.

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Common Mistakes Traders Make

Using FIFO because an exchange export defaults to it
Assuming crypto-to-crypto swaps don’t matter
Ignoring the 30-day rule
Mixing UK and non-UK accounting methods
Losing track of pooled cost after wallet transfers

These mistakes usually surface only when totals don’t add up — or when HMRC asks questions.

Why Section 104 Is Hard to Do Manually

Section 104 pooling requires:

Chronological trade ordering
Accurate GBP conversion at transaction time
Rule-based matching across months
Consistent handling of fees and partial disposals

Spreadsheets break quickly once trade volume increases.

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Conclusion

FIFO and LIFO may sound appealing, but for UK crypto traders they are irrelevant.
HMRC requires Section 104 pooling, combined with strict matching rules.

Understanding this early prevents costly mistakes later — especially as reporting standards tighten.

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