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Few mainstream financial assets are as volatile as Bitcoin (BTC). The world’s biggest cryptocurrency hit an all-time high just short of $69,000 in November 2021—but as of this writing, it’s around $24,000.
That’s a sizable loss if you bought BTC at its peak. However, if you bought in January 2021 and sold at its peak price, you would have pocketed a 115% gain.
Volatility like this is why Bitcoin investors need to keep a close eye on their profits. To help with your analysis, our Bitcoin profit calculator provides you with a simple tool to keep on top of your potential gains and losses.
This calculator uses the current market price of Bitcoin to estimate your rate of return over a set time period.
You may override the live data if you’d prefer to calculate your Bitcoin profits at different prices. This can be utilized to help set “stop loss and take profit” orders to manage your risk.
To estimate the profitability of investing in Bitcoin, a wide array of variables needs to be considered. Factors include price slippage, transaction fees as well as deposit and withdrawal fees.
Taxes should also be a consideration, but they can vary widely by country. In the U.S., the IRS treats all cryptocurrencies as capital assets. That means you’ll pay capital gains when you sell your crypto (or Bitcoin, in this case) for a profit.
Listed below are the assumptions made in the Forbes Advisor Bitcoin profit calculator:
- Bitcoin buy price: The price at which you bought Bitcoin, before fees.
- Bitcoin sell price: The price at which you sold Bitcoin, before fees.
- Investment amount: The total amount of Bitcoin purchased in dollar terms. This will be $100 by default unless you enter a custom amount.
- Investment fees: Some platforms charge a fee on transactions, especially if those transactions are in fiat currency, or if you have to go through an intermediary step, such as buying stablecoins like USD Coin (USDC) or Tether (USDT) before purchasing Bitcoin. Trading fees on the original transaction should also be included for maximum accuracy. Trading fees will depend on whether the investor is a maker (buyer) or taker (seller). There may also be other fees included. Nonetheless, all fees should be summed up and included as one entry in the calculator for maximum accuracy.
- Withdrawal fees: Some platforms charge a fixed amount or a percentage to withdraw crypto. You may need to shop around and see if it’s best to convert your Bitcoin to fiat currency before cashing it out via a withdrawal, especially for large amounts.
- Profit/loss: This is the return on the trade. If a profit is made, an investor may be liable to pay taxes.
- Total investment amount: This is the total dollar amount of the transaction, inclusive of all fees as entered in the “investment fees” section.
- Total exit amount: This is the total dollar amount that the investor receives at the end of the day, inclusive of all fees. Please note that taxes are not considered.
As we’ve noted above, the price of Bitcoin is extremely volatile. If historical data is indicative, this suggests it might be wise to take some money off the table after explosive BTC bull runs.
It also suggests that buying Bitcoin during extreme dips can be profitable if investors are prepared to weather out short-term volatility. As with all investing, past performance is never a reliable indicator of future returns.
While Bitcoin is an immense challenge for long-term investors, it is an even more difficult beast to tame for traders. Drops and gains of 10% to even 20% in a day are not unheard of.
What about average investors? Well, short-term trading in BTC is only suitable for experienced traders. Like most temperamental assets, traders need to be extra vigilant. Stop loss and take profit orders are essential, as the market can move in the blink of an eye.
Risk management must always be front and center. A close eye must also be kept on correlations if traders are wandering out beyond Bitcoin into the wider cryptocurrency space, as altcoins are known to move in tandem with Bitcoin.
Finally, the trading platform should only be chosen after careful consideration. There are numerous options in the space and current crypto regulations remain lax.
In the U.S., you must pay capital gains taxes when you sell Bitcoin for a profit.
In fact, the IRS asks a specific question on your tax form about crypto: “At any time during [the year], did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
For federal tax purposes, all digital assets are considered property. This means that if you sell, exchange or otherwise use crypto that has increased in value, you will trigger a taxable event.
The length of time you hold Bitcoin before its sale is important, however. If you bought Bitcoin at $5,000, for example, and sold at $6,000 less than a year later, this gain of $1,000 would be taxable as regular income. The percentage amount will be dictated by your federal tax bracket. These brackets vary between 10% and 37%.
If you held your Bitcoin holdings for a year or more, it would be classified as a capital gain in line with traditional securities like equities.
Whether you are a long-term investor or short-term trader, it’s best to seek professional help regarding the area of Bitcoin taxes.