If you’ve jumped into the cryptocurrency realm and made a profit from Bitcoin, you might be wondering what to do next. While the temptation to pursue further gains can be strong, financial experts caution that this could be a risky endeavor. Given Bitcoin’s unpredictable nature and the evolving landscape of digital assets, how you handle your current profits will significantly impact your financial stability in the long run.
Experts share recommendations for your next steps and outline several key actions you should take thereafter.
Protect Your Bitcoin Profits First
Before taking any financial actions, experts advise securing your existing gains after a successful Bitcoin investment. Julian B. Morris, CFP and principal at Concierge Wealth Management, emphasizes the importance of enhancing account security. This might include methods such as cold storage with a ledger or implementing two-factor authentication. Additionally, it’s crucial to eliminate “custody risk,” which refers to the danger of the platform holding your cryptocurrency potentially losing or freezing your assets.
Next, verify your cost basis—the original amount you invested—which is essential for determining your tax obligations on profits. Morris warns that many people celebrate their gains before handling necessary paperwork. “You can’t effectively plan for rebalancing or reinvesting without accurate numbers,” he cautions. Also, keep in mind that you might not receive 1099 forms for Bitcoin investments at year-end.
Know Your Tax Obligations Before Cashing Out
After securing your profits, it’s essential to understand your tax situation. While Bitcoin profits might feel like free cash, they are taxable, as noted by Ravi Parikh, CFO and managing director of Parikh Financial. Neglecting to plan for taxes can lead to costly mistakes, with tax rates ranging from 10% to 37%. The duration of your investment—short-term or long-term—will influence this rate and help you decide when to sell.
Jay Zigmont, a CFP and founder of Childfree Trust, advises working with a CPA or CFP if your gains exceed $100,000. Parikh also suggests utilizing a tax-loss harvesting strategy, where you sell underperforming assets to offset your profits.
Avoid Emotion-Driven Decisions
Once you grasp your tax liabilities, the next step is determining how much profit to realize. Parikh cautions against the mistake of holding out too long, hoping for further gains. Implementing a structured profit strategy can help maintain wealth and mitigate emotional decision-making following a significant rise. For instance, a strategy might involve selling 50% of your holdings after a substantial gain, reinvesting 25% in different assets, and keeping 25% for future growth.
Rebalance Your Portfolio Following Gains
Given Bitcoin’s volatility, a small initial investment may now represent a large portion of your overall wealth. Zigmont highlights the risk associated with being overly invested in Bitcoin, advising investors to “take your profits and run” to prevent concentration risk. Rebalancing your portfolio can restore a healthier allocation and ensure that crypto profits do not distort your financial strategy.
A diversified portfolio post-Bitcoin may include equities in various exchange-traded funds, municipal bonds, or other fixed-income assets, turning your cryptocurrency successes into tangible investments.
Consider Long-Term Goals and Risk Tolerance
After experiencing a significant gain, reassessing your financial situation and attitude toward wealth is essential. Parikh suggests using crypto earnings to focus on wealth preservation rather than aggressive growth strategies. However, Zigmont warns that Bitcoin profits might inflate investors’ perceived risk, leading to misguided beliefs about their ability to outsmart the market over time. Collaborating with a financial advisor to set new objectives can provide clarity.
Experts highlight common pitfalls, including overconfidence and lack of discipline, often leading investors to squander their hard-earned gains. “Those who experience significant gains in Bitcoin may engage in speculative behavior, overtrade, or ignore proper diversification,” cautions Morris.
Managing your Bitcoin gains wisely will allow them to work for you long after the initial excitement has passed.
