Crypto How to Take Profits for Beginners
There’s been an occasional suggestion on here to take profits whilst the going is good. This is really good advice, however I’ve not really seen any break down the different methods of doing this, so I compiled this guide to help you through the thought process. Before we dive in, I need to preface this with a disclaimer that none of the below constitutes Financial/Tax advice. Rules vary heavily region to region so consult with a local specialist if you need help.
Taking profits is an important part of any trading strategy and it doesn’t (necessarily) mean exiting your postion entirely. There are many reasons you might want to take profits, some or all of the following may be true:
- You’ve reached your investment goal
- You want to take advantage of tax-free captial gains allowances
- You want to sell in order to buy back in lower
- You’re worried the market will drop
- You need the money for something
For me #2 is most important. Whilst I see my crypto portfolio as a long term investment, the UK government gives me a tax-free capital gains allowance (£12k). As long as my total captial gains in a tax year is less than this then I pay zero tax on those gains (N.B. this is completely separate from income tax). If I don’t use this allowance this year, it is lost forever.
Fundamental to any profit calcluation is how much you spent on your current position. If all your transactions have been fiat -> crypto this is simply the sum of the amounts you spent on the transactions. It’s a little more complicated if you’ve been selling rebuying – most apps out there will give you an ‘average buy price’ figure. For a given coin, take your average buy price and divide it by the number held. For an example lets say I hold 0.2 BTC which I bought in 4 installments of 0.05 each (£800, £1200, £500, £1500). The total cost is £4000 and this is equivalent to having bought it all at 4000/0.2 = £20,000. At the time of writing BTC is trading upward of £40k, this represents a 100% gain – pretty solid! So let’s take some profits.
There’s a few different approaches here and it depends on your longer term plan. Before we dive in you need to make a plan when your emotions are cool, and you need to stick to it. Fortunes are lost when you let emotions get in the way. Make a plan and stick to it. Regardless of when you sell you will never sell at the very top, don’t even try. It’s crucial you recognise this and be comfortable with that. Try and focus on the gain you DID make. In the above example I made £4000 if I sell at £40k. That’s a phenomenal return, I’m not going to kick myself if I “could’ve made £5k if I held”. All that being said I don’t think selling it all in one hit is the best plan.
To try and combat FOMO a DCA exit strategy is more useful. You’ve probably heard of this when talking about entering the market but it’s also a viable exit strategy. Before doing any trades I want to plan what I’m doing with that 0.2 BTC. There’s two basic strategies:
- I split the stack into X chunks and sell them at your chosen frequency (maybe every day, or everytime the sell price hits a new milestone)
- I sell a percentage of my remaining stack periodically. With 0.2BTC selling 10% in intervals I’d sell 0.02, then 0.018, 0.0162 and so on. I can effectively extend this strategy infinitely, selling increasingly less and less over time, which is why it’s my preferred strategy.
You can also tweak both these strategies to suit your purposes too:
- Set a ‘reserve’ amount of your holdings. This is an amount that you will not sell as part of this strategy.
- You set a ‘minimum sale price’ where if the price is below a given threshold on a day then you do not sell.
The final thing to plan is what you’re doing with the liquidated funds. Try and decide a rough percentage of funds into the following three buckets (decide the split yourself depending on your needs)
- Withdraw to a bank account
- Put on hold until the market drops
- Buy back in immediately
This last one sounds a bit silly, but if your primary goal is to maximise your capital gains threshold but keep your holdings this is a perfectly valid strategy. By selling and then immediately rebuying you raise your cost basis for your holdings for future years – so if/when you do need it as fiat you can withdraw it much more tax-efficiently.
I hope this helps some of you.