Selling high and buying low is the 101 of all trading. But going in with a plan is essential. Nobody will truly be able to predict the peak value of any investment, so understanding as much as you can is vital.
Turning Crypto into Profits
Do you want to use crypto to make a quick buck in a few weeks? Good luck with that. Hopefully your plan a longer-term one that incorporates crypto into a wider portfolio of investments. You may opt for a hybrid approach to your investments, with a more reactive strategy for selling.
There are a few things you have to keep in mind when selling crypto.
In many places they are considered commodities for tax purposes – which can mean 50% tax rates. Finally, be considerate when choosing a bank account to send your profits into. IRA’s, RRSP’s, TFSA’s, and 401K’s might be good choices.
The question is what to do when you have assets that are worth more than you have paid for them, it is time to be thinking about selling?
Crypto-specific regulations are still very much a work in progress. For convenience sake, they have been lumped into other, already existing, categories. Most governments are on the ball when it comes to taxes. In El Salvador it’s already legal tender, so it’s treated just like all other money. In Canada, crypto is seen as a commodity, so you pay capital gains taxes on it. In the U.S.A. it’s harder to define, because there are multiple jurisdictions – 50 of them.
It’s still the wild west.
— Gary Gensler, SEC Chair
One of the core values of crypto is that it is not subject to all the same limitations and restrictions as many traditional investments. However, as you may be aware, this is changing. Crypto is not attached to any fiat currency or government bonds, for the most part. Stablecoins are the closest exception. This is because there is no central authority that can control a decentralized cryptocurrency in the way traditional finance is regulated.
In the USA, regulations will likely be tightening on crypto and other digital assets as regulatory clarity is being insisted on by both investors and the crypto industry as a whole. Exchanges may soon be regulated just like any other financial brokerage. These adjustments in regulation are largely centered on reducing crime and tax evasion that happens in any unregulated market. While this would surely make crypto trading more bureaucratic, clarifying the rules is also likely to have some positive results – i.e. making mainstream adoption easier and increasing institutional investment.
At present, crypto regulation in the US is advancing at the federal level. Its regulation falls under the auspices of the Bank Secrecy Act. Operationally, organizations such as the Securities and Exchange Commission, Financial Crimes Enforcement Network and the IRS make detailed provisions for digital currencies.
At the state level is a different matter, with most states having no specific regulations to deal specifically with crypto-related matters. As a result, efforts to address it are quite varied at present.
Some states have attempted localized efforts at regulation, producing various types of guidance, or publishing expert opinions and information.
Other states have attempted to bring in legislation to deal with cryptocurrency regulation. However, this has mostly involved adjusting existing financial policies to incorporate digital currencies.
States such as New York have produced a specific regulation called BitLicense solely focused on handling crypto. The result was that several digital currency firms immediately left the state due to the increased regulations they would have been subjected to had they remained.
Other states have made moves to attract crypto organizations into their jurisdiction. Examples include Wyoming’s laws that provide certain exemptions to crypto firms that they may be subjected to in other states. They passed 5 of them in early 2021. Under this scheme, the state takes a form of custodianship of digital currencies designed to facilitate further innovation.
In summary, it is advisable to check on local crypto laws and future proposals specific to your state. We aren’t lawyers or accountants, so we won’t offer advice on regulations, laws or investing in general. Our goal is to share information and opinions and let you decide what’s best for you in your situation. And there are usually a few people who enjoy reading about and understanding specific tax laws in each state (accountants) – try to find one of them to help you report your gains and trading activities.
A Few Recommendations
Trading out an asset for more than you bought sounds simple, and it can be in a bull market. Mind you, many people get caught up in the momentum and hype when everything is going to the moon, and they expect that their assets will continue to grow exponentially for much longer than they should. Figuring out how to turn your crypto into profit depends on your goals as an investor and the type of asset you buy.
For example, you may be purchasing crypto as a convenient way to reduce Forex fees, or to make future lifestyle purchases. Forex fees can be saved by avoiding international transfers and instead only dealing in crypto.
If you plan to use crypto as an easy and secure way of paying for online purchases, some of our recommendations will help you do just that. However, not all retailers or payment processing vendors accept bitcoin or crypto, and spending them can be a challenge for certain things.
What to Look Out For
Trying to learn how to take profits is a good problem to have. However, as with every type of financial transaction, there are certain things to look out for as you begin your journey into crypto.
Fees can vary considerably depending on the crypto platform you use. So look for a platform that suits your plans for crypto.
Smaller transaction fees will suit regular traders, while investors should look for accounts with incentives for locking crypto away in savings-style vaults. Some accounts are more suited to individual traders, whereas others are designed for institutional investors.
Coinbase charges different rates depending on your account status. For example, it charges a rate of 0.50% for selling or buying, plus transaction fees between $0.99 and $2.99.
Binance.us is known for its low fees, with a 0.1% trading fee on top of a half percent fee for instant purchases or sales. However, note that there is a 4.5% rate for making a deposit with a debit card, so users should factor this cost in.
Kraken, Bittrex, and Cex.io’s fee structures are all quite simple but not the cheapest. The platform for serious traders offers fees between 0% and 0.26%, depending on account status.
Gemini’s fees are slightly more complex, with costs of $0.99-$2.99 for transactions between $10-$200. For transactions over $200 there is a flat 1.49% fee. On top of this, a 0.50% convenience fee is added. Customers who buy their crypto with debit cards also need to budget for a 3.49% transfer fee
Although the regulations around crypto are in a state of relative infancy, the tax position is pretty clear.
“The IRS considers cryptocurrency holdings to be ‘property’ for tax purposes.” In other words, digital currency needs to be declared for tax exactly the same as other assets such as savings, stocks, currencies, or commodities. This will result in a tax burden of around 50% of your profits – the difference in the amount you paid and the amount you sold for. You can also claim losses using this very same math.
If you hope to make short-term profits from crypto, you should professionally approach your trading. To balance risk with reward in what can be a volatile asset class, good preparation is vital. Trying to achieve short-term profit constitutes a strategy of aggressive trading.
You can also plan to take profits in slightly longer increments of days or even weeks to manage this risk. As a general rule, the longer the trading time, the lower the risk involved in the trade.
You can also use dollar cost averaging. This means you invest little and often, but take profits out consistently over time. This strategy minimizes risk for the investor by cashing out when bitcoin reaches a certain price point.
Spending the crypto after its gone up in value is one of the easiest ways to take profits. With crypto, you can buy something you have always wanted – sometimes for pennies on the dollar. Sell the ETH you bought last year for a few hundred dollars and get a vintage Rolex? Why not.
Increasing numbers of companies are now accepting crypto as payment online. Technology such as Bitpay also allows firms to accept Bitcoin anywhere that accepts Mastercard.
Crypto.com is another way to control your crypto investments and use them on what you want. The platform boasts a richly featured app that gives the ability to buy & sell, earn, obtain credit and make payments.
The Maltese-registered firm offers users the ability to spend their crypto with the Crypto.com Visa card. There is even a $50 bonus for new users that meet certain conditions.
That said, user reviews for Crypto.com are a little mixed. With over 3,000 reviews on Trustpilot, there are several that are negative. A common theme is that it can be difficult to withdraw funds. The fees are also considered high by some users.
Coincards offer a flexible way to spend your crypto to buy goods, services, and travel.
Simple and easy to use, you can buy gift cards, cell phone top-ups, or retail purchases. Coincards accepts various cryptocurrencies in addition to Bitcoin, like Litecoin, Dogecoin and even Monero.
Customer reviews of Coincards are very positive, with the only downsides being that it can occasionally take longer for vouchers to be released. Nevertheless, the platform is a great way of using crypto to shop online with crypto.
Crypto, as it grows in market cap and value, allows many people to profit. It’s often when you try to realize the profit that challenges arise. Also, consider the fees your exchange charges on a transaction. It can get costly if you’re selling enough crypto to pay off debt – potentially up to 5% of the total transaction.
When you do want to cash-out, calculate your tax burden. Remember to sell at a point where there is the lowest fees or volume. Then, ensure you have enough time to research and execute trades effectively (how much are you willing to pay to exit the market) in order to maximize your profits.
And that’s essentially it. If you succeed in selling high you should be happy with your gains. It’s not advisable to exit your crypto positions entirely so consider keeping some of it intact for the next cycle.
Just remember – if you never take any profits or do anything with all your gains, then what was the point? Don’t end up like the little old lady who lives in a basement apartment with her furniture all covered in plastic and eating sardines from the tin, only to have it discovered that she kept a fortune hidden under her mattress the whole time.