Planning your Bitcoin Withdrawals

[Chainsaw]

While most of us around here tend to be long-term bullish on Bitcoin’s future, nobody knows for certain what its value will be in one year, five years, or ten years.  With an investment where the upside potential is easily hundred-fold, and the downside risk is one-fold (100% of your original investment),deciding how much to withdraw on the way up can be a torturous problem.

The ultimate goal is to find your personal balance between these two questions:

-If Bitcoin goes to $0 tomorrow, will I be able to live with the gains I locked in up to this point?
-If Bitcoin firmly establishes itself, reaching global equilibrium with other currencies, will I be able to live with the number of Bitcoins I sold along the way?

I use a spreadsheet to help play around with different withdrawal amounts. Its general approach is this: For every X% Bitcoin appreciates in value, sell Y% of my remaining Bitcoins.  Adjusting X% controls the granularity – how often and sizable each transaction is.  Adjusting Y% controls how much profit is realized on the way up, rather than left for future gains.

If you'd like your sells to have potential rebuy points, you can go a bit further, and set up the Rebuy tab.  It will generate rebuys for each of your sell points.  If you keep it updated, it can serve as a good parity check to ensure your order book is correct, while guiding the bids and asks.

Feel free to adjust the numbers in the green boxes, and play around for yourself.  If you end up using it to track your funds, you'll want to make sure to make a personal copy first, and ensure your privacy settings are as you'd like them.  (Oh, and if you find a bug or mistake, please shoot me a PM!)

2017: Bitcoin Withdrawal Strategy

Mostly for posterity (for now at least), a link to the original spreadsheet:

Version 1 - https://docs.google.com/spreadsheet/ccc?key=0AqpoRK3q-_aKdHdwd0VubzdJbkQ5OF9GRlplVXRVY2c&usp=sharing
Version 2 - Bitcoin Withdrawal Strategy spreadsheet.

I don't think of this spreadsheet or plan as a trading strategy, such as entering and exiting the market based on movements above and below weighted averages. You could consider it a very long-term trading strategy whose aim is buy-and-hold, with the only trading done being to incrementally lock in gains at predefined price targets.  If you want to get creative, you could make a copy for your conservative long term withdrawals, and a separate copy, having far more aggressive rebuy targets for the trading portion of your portfolio.

Just know that this plan can exist for your long term planning, and you can still trade funds on a shorter time-frame, realizing BTC-based gains and losses along the way.

And of course, remember that your trading strategy must align with your broader-still investment strategy, consider tax implications, etc. That's not really the aim of this tool, or thread.  Here I hope to explore the various uses or strategies that people have found beneficial.  Hopefully people will be able to pick up a few new ideas that they can then evaluate and/or integrate into their trading approach.

If you follow pre-established buy and sell points rigidly, long-term you put yourself in a win-win situation.  If the price continues rising from its relative point, you will still hold the number of Bitcoins you are comfortable with, while holding profits.  If the price downturns after you have sold some long-term funds, you have a choice.  You can do nothing, and continue to keep your long-term profits locked in.  But you'll also have the choice of reinvesting at a lower price, gaining Bitcoins, while setting up to resell them once again at a predefined future sell price.

I hope some of you find it valuable!

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[Syke]

I was pretty happy when I was using a 1% cashout every $10 increase, so I made a copy of the spreadsheet and switched it from % increases to fixed $ increases. It's a good looking plan.

[tvbcof]

Tax implications have a lot to do with my strategy.  The tax system in the US is so rigged for rich people that if someone does not take a wage, the taxes on capital gains seem to be tiny.  Perhaps even non-existant?  Thus, I'll probably be waiting until next year to start in on any real sales and I'll do my level best to not make any money aside from my BTC sales.  This will keep me looking like a rich person and thus untouchable by the IRS.

What a sick fucking system we seem to have.  Oh well.  I'm not going to complain to bitterly until I'm done milking it.

[DeathAndTaxes]

Where do you get the idea that capital gains are tiny or non-existent.  Have fun with that idea. 

[Syke]

Where do you get the idea that capital gains are tiny or non-existent.  Have fun with that idea. 

http://finance.yahoo.com/news/first-person-advantage-0-capital-gains-tax-rate-214600255.html

under current law, taxpayers in the lowest two tax brackets (10% and 15%) pay no taxes on long-term capital gains or qualified dividends.

So be sure to hold onto those bitcoins for at least a year.

[DeathAndTaxes]

Where do you get the idea that capital gains are tiny or non-existent.  Have fun with that idea. 

http://finance.yahoo.com/news/first-person-advantage-0-capital-gains-tax-rate-214600255.html

under current law, taxpayers in the lowest two tax brackets (10% and 15%) pay no taxes on long-term capital gains or qualified dividends.

So be sure to hold onto those bitcoins for at least a year.

Key word in the two lowest tax brackets.  I doubt most people would consider the two lowest tax brackets as "rich".

[tvbcof]

Where do you get the idea that capital gains are tiny or non-existent.  Have fun with that idea. 

My CPA, FYI.  I had a meeting yesterday.  Seems that certain 'temporary' tax programs (or un-tax programs) keep being extended and/or are made permanent.  I think we both though it was bullshit, but even if it was someone else's lobbying money, I'm willing to jump on the sled for a free ride.

For my part I'm going to dot every 'i' and cross every 't', but if it turns out that I can leverage being a non wage-slave, I can certainly arrange that.  For 2014 at least.

[theonewhowaskazu]

Where do you get the idea that capital gains are tiny or non-existent.  Have fun with that idea. 

http://finance.yahoo.com/news/first-person-advantage-0-capital-gains-tax-rate-214600255.html

under current law, taxpayers in the lowest two tax brackets (10% and 15%) pay no taxes on long-term capital gains or qualified dividends.

So be sure to hold onto those bitcoins for at least a year.

Key word in the two lowest tax brackets.  I doubt most people would consider the two lowest tax brackets as "rich".

You could argue that you could be "rich" in Bitcoin, just not report it.

[tvbcof]

Where do you get the idea that capital gains are tiny or non-existent.  Have fun with that idea. 

http://finance.yahoo.com/news/first-person-advantage-0-capital-gains-tax-rate-214600255.html

under current law, taxpayers in the lowest two tax brackets (10% and 15%) pay no taxes on long-term capital gains or qualified dividends.

So be sure to hold onto those bitcoins for at least a year.

Ya, I had zero inclination to buy BTC since the end of 2011.  Prior to that my interest was fairly high.  I'm lucky that way sometimes.

[tvbcof]

Where do you get the idea that capital gains are tiny or non-existent.  Have fun with that idea. 

http://finance.yahoo.com/news/first-person-advantage-0-capital-gains-tax-rate-214600255.html

under current law, taxpayers in the lowest two tax brackets (10% and 15%) pay no taxes on long-term capital gains or qualified dividends.

So be sure to hold onto those bitcoins for at least a year.

Key word in the two lowest tax brackets.  I doubt most people would consider the two lowest tax brackets as "rich".

You could argue that you could be "rich" in Bitcoin, just not report it.

I've got no interest in being rich in jail.  Or making my attorney rich by keeping me out of it.  Different strokes for different folks though I guess.  To bad DPR cannot weigh in on the matter.

[tvbcof]

Where do you get the idea that capital gains are tiny or non-existent.  Have fun with that idea. 

http://finance.yahoo.com/news/first-person-advantage-0-capital-gains-tax-rate-214600255.html

under current law, taxpayers in the lowest two tax brackets (10% and 15%) pay no taxes on long-term capital gains or qualified dividends.

So be sure to hold onto those bitcoins for at least a year.

Key word in the two lowest tax brackets.  I doubt most people would consider the two lowest tax brackets as "rich".

I think you are not picking up on how this stuff works to be honest.  Or deliberately neglecting to do so.  A person who can live on long term capital gains alone is not considered 'poor' by most people.

Beyond that, most wealthy people probably don't consider anyone who actually earns money, no matter how much, to be in their class.  And rightly so.

Looks to me like the tax program under discussion is configured to benefit family members of the wealthy.  Earning money is probably not a high priority for many of these folk and is likely considered with some amount of scorn.

I was never a big fan of the flat tax, but I'm starting to see at least a little bit of potential utility.  I had no idea how fucked up and unfairly balanced toward the wealthy things are.  That is probably no accident.

[Syke]

Key word in the two lowest tax brackets.  I doubt most people would consider the two lowest tax brackets as "rich".

But "rich" people can drop themselves down into the lowest tax brackets. For example, if bitcoins go up high enough, I'll pay off my mortgage, have no other debt, and be able to reduce my regularly needed income to much lower levels and stay down in the bottom tax brackets while living very comfortably.

[DeathAndTaxes]

Key word in the two lowest tax brackets.  I doubt most people would consider the two lowest tax brackets as "rich".

But "rich" people can drop themselves down into the lowest tax brackets. For example, if bitcoins go up high enough, I'll pay off my mortgage, have no other debt, and be able to reduce my regularly needed income to much lower levels and stay down in the bottom tax brackets while living very comfortably.

How are you going to pay off your mortgage?  By selling $200K worth of BTC?  That is going to put you above the first two tax brackets. 

Can someone live on $38K in taxable income.  Sure.  People live on a lot less.  It is hardly what I would consider rich.  If you are living on more than that well you are going to pay capital gains taxes. 

Not really interested in debating anymore.  tvbcof wants to believe the "rich" pay nothing in capital gains taxes well maybe someday he will be "rich" and find out that isn't the case.   It will be far worse if in the future IRS decides to classify Bitcoin capital gains as Forex capital gains (which logically makes sense) as the rates will go even higher (60/40 rule).

[DeathAndTaxes]

I think you are not picking up on how this stuff works to be honest.  Or deliberately neglecting to do so.  A person who can live on long term capital gains alone is not considered 'poor' by most people.

That was my whole point.  THE LOWER INCOME BRACKETS have 0% capital gains, thus a post about how the rate can be as low as zero doesn't really apply when talking about being rich.  Would you agree?

The upper income brackets have 15% or 20% long term capital gains and short term capital gains are at NORMAL INCOME RATES (which is up to 35%).  Now in 2013 you get to add 3.8% "bonus tax" for Obama care.   Also don't forget most states treat capital gains as regular income so throw in another 3% to 11%+ depending on your state.  It varies a lot by states so your luck may vary, everything from full income tax rate, to reduced tax, to no tax.

http://taxes.about.com/od/capitalgains/a/CapitalGainsTax.htm

So say you are in the highest bracket (single >$400K taxable income) and live in California and you hold a Bitcoin for 364 days.   Your "low" capital gains rate would be 39.6% federal + 3.8% bonus + 10.5% state = 53.9%.

Oh and the fun part is it likely is only a matter of time before IRS treats Bitcoin exchanges like Forex exchanges which means the 60/40 rule comes into play.  That will mean even long term trades are taxed at a mix of long & short rates and thus capital gains could be as high as 39.6% (including bonus Obamacare tax) plus state taxes.  Worse there is no way to reduce it by holding 365 days or more. 

Starting to get the picture?   Yes capital gains taxes are lower than regular income primarily because there is no Social Security or Medicaire but if you are making >$108K in regular income those taxes are capped anyways.  If you want to make smart tax avoidance strategies (as opposed to tax evasion) you need to drop this "rich don't pay taxes" meme because it is only going to cost you a fortune if you are every rich.

As for flat tax.  60% of Americans pay no income tax in the US.  You really think they are better under a flat tax?  The top 5% of Americans pay 25% of the income tax you really think they are worse under a flat tax?   The flat tax may be fairer but it isn't fairer in the sense most Americans think.

[Syke]

How are you going to pay off your mortgage?  By selling $200K worth of BTC?  That is going to put you above the first two tax brackets. 

Yes, for just 1 year. Then the next 50 years I'll be back down in the bottom tax brackets.

Can someone live on $38K in taxable income.  Sure.  People live on a lot less.  It is hardly what I would consider rich.  If you are living on more than that well you are going to pay capital gains taxes. 

A couple making up to $72,500 is in the 15% tax bracket, and without any debt, $72k is a very very nice living. Beyond that you get the 0% long-term capital tax rate. Score!

[DeathAndTaxes]

Once again "nice living" =/= rich.  Please try to stay on topic.  The claim made was the "rich" pay little to nothing in capital gains taxes.  That is a false statement.  Poinring out that the middle class has a low capital gains tax is "proving" to me something I never disputed.


Also not sure what you mean by "beyond that you get 0% long-term capital tax rate"?  If you are "beyond that" (as in more income?) you would be in the next tax bracket and thus would pay MORE not zero in capital gains taxes.

[Chainsaw]

This has been a great discussion. (And I hope it's just getting started!)

I think of this sheet as a planning tool for bitcoin withdrawals.
I consider shorter-term trading as a layer below that.
I consider wealth management planning as a layer above.

For those that consider all these layers, it is absolutely true that any withdrawals made must be in line with the overarching wealth management plan.

There hasn't been a ton of public thought and discussion on the wealth management aspect.  (I made the mistake of trying to offer that when I was still a newbie, and it didn't go so well.)  So, while the focus of this thread has gone in a bit of a different direction that I had originally intended, it's certainly been enlightening and enjoyable to absorb.

[tvbcof]

I think you are not picking up on how this stuff works to be honest.  Or deliberately neglecting to do so.  A person who can live on long term capital gains alone is not considered 'poor' by most people.

That was my whole point.  THE LOWER INCOME BRACKETS have 0% capital gains, thus a post about how the rate can be as low as zero doesn't really apply when talking about being rich.  Would you agree?

The upper income brackets have 15% or 20% long term capital gains and short term capital gains are at NORMAL INCOME RATES (which is up to 35%).  Now in 2013 you get to add 3.8% "bonus tax" for Obama care.   Also don't forget most states treat capital gains as regular income so throw in another 3% to 11%+ depending on your state.  It varies a lot by states so your luck may vary, everything from full income tax rate, to reduced tax, to no tax.

http://taxes.about.com/od/capitalgains/a/CapitalGainsTax.htm

So say you are in the highest bracket (single >$400K taxable income) and live in California and you hold a Bitcoin for 364 days.   Your "low" capital gains rate would be 39.6% federal + 3.8% bonus + 10.5% state = 53.9%.

Oh and the fun part is it likely is only a matter of time before IRS treats Bitcoin exchanges like Forex exchanges which means the 60/40 rule comes into play.  That will mean even long term trades are taxed at a mix of long & short rates and thus capital gains could be as high as 27.5% (plus 3.8% bonus Obamacare tax).

Starting to get the picture?   Yes capital gains taxes are lower than regular income primarily because there is no Social Security or Medicaire but if you are making >$108K in regular income those taxes are capped anyways.  If you want to make smart tax avoidance strategies (as opposed to tax evasion) you need to drop this "rich don't pay taxes" meme because it is only going to cost you a fortune if you are every rich.

As for flat tax.  60% of Americans pay no income tax in the US.  You really think they are better under a flat tax?  The top 5% of Americans pay 25% of the income tax you really think they are worse under a flat tax?   The flat tax may be fairer but it isn't fairer in the sense most Americans think.

I capitulate.  I don't know a lot about the minutia of the tax structure and I don't care much about it.  I'm happy to employ a CPA since it mainly bores me.

I would grumble if I end up taking $500k per year out of my BTC speculative wins and pay 50% on it, but I would not really consider it unfair.  Or it if is, then I would still consider it acceptable as long as the government is maintaining a workable and decent society, and as long as they are operating a level playing field.  I have serious doubts about both, and significant difficulties with our droning innocents to death halfway around the world and such things.  To that extent I do have some trouble with taxes.

[Syke]

Once again "nice living" =/= rich.  Please try to stay on topic.  The claim made was the "rich" pay little to nothing in capital gains taxes.  That is a false statement.  Poinring out that the middle class has a low capital gains tax is "proving" to me something I never disputed.

Then we have a different definition of rich. I consider someone pulling in $70k in salary, with absolutely no debt, to be basic-rich. Add in millions in capital gains at 0% tax rate, and that's mega-rich.

[DeathAndTaxes]

Once again "nice living" =/= rich.  Please try to stay on topic.  The claim made was the "rich" pay little to nothing in capital gains taxes.  That is a false statement.  Poinring out that the middle class has a low capital gains tax is "proving" to me something I never disputed.

Then we have a different definition of rich. I consider someone pulling in $70k in salary, with absolutely no debt, to be basic-rich. [

Woo hoo I am RICH and never knew it.  I need to call my mom!  Then again tvbcof post was about ULTRA WEALTHY I assume (and he confirmed with $500K tax post) he was talking about millionaires and billionaires.

Add in millions in capital gains at 0% tax rate, and that's mega-rich.

That is incorrect.  Not sure how much simpler I can make it.  The 0% capital gains rate only applies to TOTAL INCOME (in all forms including capital gains) which would put you in the two lowest brackets.  

If you have $0 in wages and $1M in capital gains you are looking at as much as 53% short term capital gains rates.  Even long term rates are at least 20% + 3.8% (Obamacare bonus) + state rate.  IRS hasn't yet clarified on treating Bitcoins as other Forex transactions but if they do it would be >30% plus state for all tx long and short.

While you don't pay "regular income" tax rates on long term capital gains, ALL FORMS OF INCOME count towards the threshold for which bracket you will pay.