Short-term capital gains can play havoc with the decision to take some gains with which to buy a dip. For example, let’s assume I bought 1 bitcoin at 20k and am too timid to risk holding out for a 90k top and sell that 1 bitcoin at 80k. (In reality, I would sell increasing portions into the top, like 1/15th at 70k, 2/15ths at 72k, 3/15ths at 74k, etc, until I sold my last at 80k; or even more likely only sold half at all, using 1/30th, 2/30ths, and so on. For the purposes of discussing taxes, though, let’s assume I just sell it all at once when it reaches 80k.)
Because I’ve held that bitcoin for less than 12 months, let’s assume I have to pay 25% tax. That would mean a 15k tax bill due on the 60k profit on the sale. Let’s assume on the way down I am again too timid to hold out for the lowest low and buy back in at 40k — a 50% drop for me even though the actual drop from top to bottom could be much higher. The 80k would purchase 2 bitcoin at that price. Many months later when bitcoin hits 100k during tax season, I would sell 15k of my now 200k to pay the tax bill due. That sale would also be taxed so we have to subtract 25% of that 15k as well. After I subtract the 15k tax and the 3.75k tax I would clear 181.25k.
What if the slump takes me into tax season? Then I won’t have 80k cash, but instead only 65k after taxes which at a buy the dip price of 40k would only buy 1.375 bitcoin. That would only leave me 37.5k ahead for all the trouble when bitcoin finally hits 100k.
Is the potential extra 37.5 — 81.25k worth the trouble and risk that I might screw up the timing? It depends on whether I’m smarter than everyone else, right😏? What if, while I’m waiting to buy back in, bitcoin turns back up again? If I don’t buy back in BEFORE it gets to 65k I will lose overall because of the 15k taxes. If I am not able to buy back in during the sweet spot between my predicted low of 40k and my breakeven point of 65k — I LOSE! It is not uncommon for bitcoin to change 5% in one day during such corrections, so would risk getting trapped if I was waiting one evening for bitcoin to drop from 60k but instead it jumped 5% (3k) and then another 5% (3k) early the next morning. I would lose 3k and still have the 15k tax bill to pay (which could affect my overall marginal tax bracket). If I didn’t buy back in quick enough, my losses could quickly mount up to 6k, 9k, 12k, etc. Is the risk of those potential losses worth the potential gain? At this point, not for me.
If bitcoin tops at 90k this cycle and then drops 67% down to 30k, I’ll still be at a 50% gain over the 20k I originally paid. Also, if I sell at 100k I will only pay a 10% long-term capital gains tax on the 80k profit and thus ultimately clear 92k which is a 360% return. Having bought the dip, though, I would still be in a short-term tax rate of 25% if I sold the 181.25 or 137.50k I achieved by doing so. After that 25% tax on the profits above the 80k paid, I would clear 156k or 123k; 680% and 515% respectively.
Obviously, the time to buy most of one’s bitcoin is when it is in a slump. If you didn’t, then taxes will strongly encourage you to hold until the next top before you consider any selling.
Timing a market is a daunting task and taxes complicate it. If you sell incrementally higher portions into the highs and also buy incrementally higher portions into the lows, then theoretically, you should be able to squeeze out some extra gains. However, few people have most of their funds in a USA Roth Account which allows them to escape the tax factor. Fewer still, given the overall bullish trend of bitcoin, are willing to go all-in or all-out on their timed buys and sells and thus, for all the extra trouble, only will achieve added gains on a small portion of their holdings.
At this point, given the fact that I can live fine on my pension, and have a good inflation hedge when the interest I earn on my bitcoin is added, I’m inclined to just HODL for a few years and reassess things then.
Also, if big buyers are waiting in the wings to buy dips then selling into a dip becomes much more difficult and risky for the little guys. By the time we sell and pay taxes, the price can jump up again beyond what we expected. Yes, we reduced our exposure to a severe drop, but we can just as easily end up losing if big buyers push the market higher while we mess around with trying to time it.