With the $10,000 milestone achieved, the question "Should I sell my Bitcoin?" will be on the lips of many investors in the cryptocurrency, especially if they're sitting on enormous, unrealized gains.
Selling Bitcoin and booking profits now has obvious appeal. Currently trading at about $10,900, the Bitcoin price is up more than 1,000% in 2017 and more than 1,370% over the past 12 months.
That means $1,000 invested one year ago is worth $14,700 today. Even an investor who bought Bitcoin at $2,500 in July has gains of 335%.
But cashing out everything might not be the best strategy.
Here's what you need to consider before selling your Bitcoin...
Should I Sell My Bitcoin Now? What You Need to Know
The first issue you need to look at is taxation. Yes, your Bitcoin windfall is taxable. According the IRS, cryptocurrency profits are considered capital gains.
The federal capital gain tax for most middle-class Americans is 15%. And that doesn't count state and local taxes - unless you're lucky enough to live in a state that has no capital gains tax (Texas, Nevada, South Dakota, Florida, Tennessee, New Hampshire, Wyoming, and Washington).
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Most states take an additional 5%, although a few take quite a bit more. California, for instance, has no special treatment for capital gains, which means your gains will be taxed at the state's standard 13.3% rate. That's a big bite out of your Bitcoin bonanza.
Plus, a Bitcoin gain of hundreds of thousands of dollars could bump you into the higher 20% bracket. So if you have really large gains, you don't want to sell all of your Bitcoin in the same tax year.
And if you think you can cheat Uncle Sam by simply not reporting your gains, think again. Cashing out almost certainly will mean transferring your U.S. dollar proceeds to a bank.
By law, banks must report the deposit of any amount larger than $10,000 to the U.S. government (breaking up the amount into smaller deposits to evade the requirement is a crime). And banks may well report transactions far smaller than that, as Money Morning Capital Wave Strategist Shah Gilani found out a couple of years ago.
In short, the safest course of action is to pay taxes on your Bitcoin gains. Just make sure that when you sell your Bitcoin, you set aside 15% to 30% for your friends at the IRS.
But paying taxes isn't the only reason to think twice before cashing out your Bitcoin right now...
The Bitcoin Price Is Far from Its Peak
Although critics like to say Bitcoin is a bubble that will burst at any moment, they've been saying that at least since mid-2011, when the Bitcoin price spiked to a ridiculously high $30.
It's always possible the price of Bitcoin could collapse (that's true of just about any investment), but bubble fears aren't a good reason to sell your Bitcoin. Just ask the folks that cashed out at $20 (2011), or $200 (early 2013), or $1,000 (late 2013), or $2,500 (this past June).
Several respected analysts see the Bitcoin price moving significantly higher from here. Hedge fund manager Mike Novogratz told CNBC this week that the price of Bitcoin could get to $40,000 by the end of next year.
Meanwhile, Ronnie Moas, head of Standpoint Research, told the CoinTelegraph he sees the Bitcoin price reaching $15,000 in 2018. But over the next five to 10 years, he sees much bigger gains.
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If Bitcoin captures just 1% of the $200 trillion of capital now invested in stocks, gold, cash, and bonds, Moas says it could reach as high as $125,000. That represents a 1,250% gain over a Bitcoin price of $10,000.
So if cashing out of Bitcoin at $10,000 isn't the way to go, what should investors do instead?
You have a couple of options...
What You Should Do When the Bitcoin Price Hits $10,000
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At the very least, those with big gains in Bitcoin should extract the amount they initially invested. This is a tried-and-true Money Morning strategy that works for any well-performing investment.
"If you have a 100% gain, sell half," said Money Morning Director of Technology & Venture Capital Research Michael A. Robinson. "That way, you get back your entire investment and are 'playing with house money.' This strategy keeps you in the market capturing fresh gains with no further risk to your original capital."
But those who have owned Bitcoin for any length of time have far more than 100% gains. That means you can follow this strategy by selling a much smaller portion of your Bitcoin.
So a person who bought $1,000 worth of Bitcoin on Jan. 1 - a little more than one bitcoin at the time - need only sell 0.1 of that to get their $1,000 out (or 0.13 if you include taxes).
It's OK to take some profits as well, but you'll want to keep some portion of it invested in Bitcoin to capture potential future gains. Just bear in mind the tax implications.
If you're struggling with how much profit to take, perhaps your other investments can help you decide.
I'm talking about those money-losing investments you've been loath to sell, hoping in vain they'll recover someday.
If you have thousands of dollars of unrealized losses, now's the time to put them to use. Selling a losing stock in the same year as you book Bitcoin gains means you can offset your gains with those losses.
So if you sell a stock at a loss of $1,000, and sell some Bitcoin for a gain of $1,000, the two cancel out - resulting in no extra tax owed by you. You can do this even if you don't itemize your deductions.
You'll still lose money on that lousy stock, but you'll reduce or eliminate the capital gains taxes on your Bitcoin profits.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.