Wondering whether you should sell your Bitcoin?
Let’s be clear: whether or not you should sell your Bitcoin is dependent on multiple factors in your personal life, including but not limited to your current financial situation.
That being said, there are a few factors that every investor should take into account before making the decision to sell. In this guide, we’ll go through three essential questions you should ask yourself before you sell your tokens (and a couple of action items once you’ve made your decision).
Before you make the decision to sell your Bitcoin, it’s important to keep in mind the possible tax ramifications of your decision.
When you sell your Bitcoin, you’ll incur a capital loss or a capital gain based on how the value of your tokens has fluctuated since you originally received them.
You can calculate how much capital gains/capital losses you’ll incur through this simple formula:
If the price of your tokens has gone up in value since it was originally received, you’ll be required to pay capital gains tax on your profits. If you are planning to sell your Bitcoin at a profit, you may want to consider how much money you’ll be left with after taxes.
If the price of your tokens has gone down in value since it was originally received, you will be able to claim a capital loss and offset your capital gains for the tax year and up to $3000 worth of income. If you are planning to sell your Bitcoin at a loss, you may want to consider how it will impact your capital gains for the tax year.
Depending on how long you’ve held your Bitcoin, your gains may be taxed as long-term or short-term capital gains.
If you’ve owned your Bitcoin for less than 12 months, you’ll need to pay the higher short-term capital gains tax. If you’ve owned your Bitcoin for more than 12 months, you’ll pay the lower long-term capital gains tax.
If you’re currently thinking about selling your tokens, you should keep in mind that Bitcoin and other cryptocurrencies have a unique characteristic that make them a better candidate for tax-loss harvesting than traditional equities.
At this time, the IRS has a wash sale rule in place that says that a capital loss cannot be claimed on securities if they are bought 30 days before or after a sale. However, IRS guidance has labeled cryptocurrencies like Bitcoin as property, not securities.
Based on current IRS guidance, it’s reasonable to assume that the wash sale rule does not apply to cryptocurrency at this time (however, the IRS will soon be changing the wash sale rule for crypto). Many investors choose to sell their crypto, claim a capital loss, and buy back their tokens shortly after.
For more information, check out our complete guide to tax-loss harvesting.
Some investors don’t want to sell their Bitcoin but still need fiat currency for their own personal use. In this case, many investors choose to leverage cryptocurrency loans.
With a cryptocurrency loan, you’ll be able to receive fiat money as a loan using your Bitcoin as collateral. Typically, you’ll be required to pay your loan with interest on a monthly basis.
Popular options for Bitcoin loans include BlockFi and Celcius Network.
If you make the decision to sell your Bitcoin, you can sell your tokens through exchanges such as Coinbase, Gemini, and Kraken. Keep in mind that these platforms typically charge fees on your transactions.
To report your Bitcoin taxes after a sale, you’ll need your original cost basis for buying your tokens. Unfortunately, finding this information can be difficult, especially if you’re using multiple wallets and exchanges.
Luckily, there’s an easier way. CryptoTrader.Tax can integrate with all the exchanges and wallets you are using in minutes.
There’s no need to try to find your original cost basis on your own - you’ll have a record of all your crypto transactions on your account. Once you’ve imported your transaction data, you can file your taxes with the click of a button or send the information to your accountant.
Interested in joining the 100,000+ other investors using CryptoTrader.Tax? Try a free preview report - there’s no need to enter your credit card details until you’re 100% sure your transaction history is accurate.