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…