Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.
Things To Consider Before Cashing Out
Tax Implications
The tax implications of cashing out your crypto depend on how long you’ve held it and how much you’ve spent on goods and services.
In the U.S., the IRS treats cryptocurrency as property, which means it is subject to capital gains taxes. When you “cash out” your crypto and exchange it for U.S. dollars or another fiat, you could realize a gain or a loss.
The only exception is if you are exchanging a stablecoin for fiat when you’re cashing out. Stablecoins and USD can typically be treated as the same asset for tax purposes. Of course, there isn’t clear guidance from the IRS, so it’s always best to talk to an accountant first.
Withdrawal Limits
Most cryptocurrency exchanges and payment processors have daily limits on how much crypto you can cash out at a time. This prevents a bank run and helps crypto exchanges comply with anti-money laundering regulations.
These limits can range from $20,000 to $100,000. It depends on the size of the exchange you’re using and your relationship with them.
Every method mentioned in this article has hard withdrawal limits.
Market Timing
While no one can time the market perfectly, savvy investors consider market conditions before cashing out on digital assets — the best time to take profits toward the end of a bull run.
Another reason to cash out (or not) involves taxes. If you have unrealized losses, it can be advantageous to cash out your digital currency before the end of the year to lower your tax bill.
The opposite is true; if you have unrealized gains, it might be worth waiting for New Year’s to sell. If there’s one near certainty in the cryptocurrency market, prices will likely dip during tax season.
When traders see their tax bill, there’s usually a selloff so traders can pay their taxes.
Crypto Exchanges
Crypto exchanges are where most people cash out their crypto and are one of the best places to engage in crypto trading. To use exchanges in the United States, you must verify your identity with several documents like a driver’s license or passport.
Outside of the U.S. exchange, KYC (know your customer) is looser in general and non-existent in some jurisdictions. Of course, there are exceptions, like China, where crypto has been completely banned.
Once you are KYC-ed, you can start buying and selling crypto. When it’s time to cash out, you can use an exchange to trade crypto for USD.
You need to connect your bank account to get the USD out of the exchange. Then you can withdraw it using ACH or wire transfer. It can take a few days for both transfers. Many exchanges offer instant withdrawals for a higher fee.
Crypto exchanges have the advantage of the highest withdrawal rate of all the methods in this article. Exchanges also support cashing out many different types of crypto assets.
In one place, you can trade Bitcoin, Litecoin, Ripple, and Doge; you name it. And the beauty of exchanges is you can cash it all out and transfer it to your bank in one place.
The other benefit is sending cryptocurrency to exchanges directly from your various wallets. You can even save on transaction fees if
Peer-to-Peer Marketplaces
Peer-to-peer or P2P marketplaces are like matchmaking services for people who want to on-ramp or off-ramp crypto using physical cash in person.
Here’s how it works:
When you log on to a P2P marketplace, you can filter by region and cryptocurrency.
There will be a list of sellers in your area who will give you cash in exchange for crypto. You will likely have the most luck looking for Bitcoin and Ethereum buyers.
Conversely, some sellers will give you cryptocurrency in exchange for cash.
What do these market makers get out of it? They get a spread on either side of the exchange. It’s usually just a few percentage points in large cities.
On many of these P2P marketplaces, there are even buyers and sellers who accept payment mobile apps like Paypal or Venmo. But because these transactions can be reverted and aren’t entirely “trustless,” these people have to charge a huge premium which can be upwards of 25%.
Finally, P2P crypto buyers only have so much capital and risk tolerance. You may need more than one market maker to buy or sell large cryptocurrency volumes.
ATMs
The first Bitcoin ATM was unveiled in Vancouver in 2013. Now there are almost 40,000 across the world. Most support other cryptocurrencies like Litecoin and Ethereum; some even have Dogecoin.
Bitcoin ATMs let you exchange crypto for fiat currency and vice versa.
First, find an ATM in your city to cash out using a Bitcoin ATM. It may be worth your time to do a little research on the ATMs around you first.
Not all ATMs offer cashout services, only on-ramping. Watch out for high fees above 10% and withdrawal limits too.
Once you’ve found an ATM, you enter your withdrawal amount, and it gives you a Bitcoin (or whatever crypto you’re using) address to send BTC to.
The machine should offer a QR code or a mobile app, so you don’t have to manually copy the deposit address by hand.
The user sends the amount of BTC on the screen from their Bitcoin wallet to the address. After it confirms on the blockchain, the money is dispensed. This works the same way with other digital wallets. The confirmation times may be different depending on network speed.
When you deposit fiat currency into an ATM, it will send the equivalent amount to the crypto wallet of your choice. It even works with a hardware wallet.
Bitcoin ATMs have a limit of a few grand, usually up to $10,000 at most. The limit may be even lower in regions unfavorable to crypto — just a few hundred dollars.
Governments seeking to crack down on money laundering and terrorist financing are understandably skeptical of crypto ATMs.
Debit Cards
Many crypto exchanges offer debit cards that function like standard debit cards and bank accounts. For example, Crypto.com and Coinbase have partnerships with Visa, allowing them to issue fully functional debit cards.
USD in your exchange account is debited when you swipe the card. You may not even have to cash out to a bank account using a crypto debit card. It can be used for everyday purchases.
You could also use the debit card to move USD off the exchange by connecting with a payment platform like Paypal or Venmo.
You can also use your regular bank debit card to deposit and withdraw USD if you don’t want to enter sensitive bank account information. This alternative to ACH or wire transfer is only available at specific exchanges.
Crypto debit cards come with nifty perks like cashback in the cryptocurrency of your choice. Other perks include airport lounge access, free swag, and increased staking rewards.
Mobile Apps
As cryptocurrency trading grew in popularity, traditional brokerages and payment providers began offering exchange services. Robinhood, Paypal, Cash app, and others are all places you can buy and sell cryptocurrency using your phone.
Check those FAQs, though. Each app has different rules on sending and receiving crypto outside of the app. And mobile apps are notorious for handing out glorified crypto IOUs. Remember, “not your keys, not your coins.”
Most exchanges also offer mobile apps that allow you to monitor your portfolio and cash out. If you pair a mobile crypto wallet with a mobile exchange app, you can manage your whole crypto portfolio without a real computer.
The Bottom Line
There are several considerations to keep in mind when cashing out your cryptocurrency. These include tax implications, withdrawal limits, and timing.
Choosing where to cash out your crypto gains is almost as important as your trading strategy. Bitcoin ATMs and P2P marketplaces can be excellent if you don’t like paperwork.
Centralized exchanges are for regular traders who want to trade lots of coins and have access to organized records of their trades. But exchanges require government ID and aren’t available in all jurisdictions.
Crypto on-ramps are an in-between option for those who aren’t adventurous enough for ATMs or P2P but don’t want to wait on a bank transfer from an exchange. The catch is that this option usually has higher fees.
Tax treatment is another primary consideration when you cash out your crypto gains. You should have a baseline understanding of capital gains taxes for your income bracket. Most traders should use a crypto accountant to file with the IRS.
Sources:
Crypto is fully banned in China and 8 other countries | Fortune
9 years after the first Bitcoin ATM, there are now 38,804 globally | Coin Telegraph
Why tax season may be adding to the rout in Bitcoin | Yahoo Finance
Bitcoin ATM Near Me: Find Bitcoin ATM Locations Nearby | GOBankingRates
