How to Cash Out Bitcoin [A Guide for Beginners]

Bitcoin (BTC) is one of the most popular crypto coins and the one most beginners start investing in. As you build up your crypto portfolio, you may want to cash out your bitcoin to diversify, pay some bills, or harvest your gains.

While you can spend bitcoin at certain retailers, you'll need to convert your bitcoin into local currency for most purchases. Here's how to cash out bitcoin to deposit money into your bank account.

Can you deposit bitcoin in your bank account?

You cannot simply deposit digital currency into your checking account at the bank down the street. The same goes for stocks, bonds, mutual funds, and many other investments. Most banks do not yet accept bitcoin for deposit, so you'll need to convert your bitcoin into cash before you can deposit it.

Many cryptocurrency investors hold onto their coins for the long haul because they believe the coins will continue to increase in value. But after you've learned how to buy cryptocurrency and have made some profits, you may be thinking about selling some of your coins. You can use the money to pay bills, buy a car or home, or lock in your gains and diversify into other investments.

What is the best way to convert bitcoin to cash?

Selling crypto is typically done one of two ways — through a third-party exchange or peer-to-peer exchange.

Third-party broker exchanges

The closest comparison to using a third-party broker exchange is exchanging foreign currency for U.S. dollars (USD). Many travelers convert their foreign currency at a bank or exchange company and receive cash immediately. With bitcoin, you deposit your coins into an exchange, and then you can request a withdrawal in the currency of your choice.

Just like the stock and foreign currency markets, the prices of bitcoin and other crypto coins are constantly fluctuating. Exchanges like Coinbase and Kraken allow you to watch the prices rise and fall based on demand, news, regulations, and other factors.

For most of the best cryptocurrency exchanges, selling bitcoin results in a U.S. dollar balance in your wallet. Once this transaction has been completed, your money is available for withdrawal. To withdraw your cash, you must link your bank account to the exchange platform of choice. In most cases, your bank account will be the same one you used to deposit the initial money to buy your bitcoin.

The timeframe for receiving your money depends on which exchange you're using and the chosen withdrawal method. Wire payments are faster than EFT or ACH transactions, but there is a higher fee for wires. Some banks offer real-time payments (RTP), which enables customers to receive instant payouts from the exchanges without the expense of a wire.

Peer-to-peer exchanges

With a peer-to-peer platform, or P2P exchange, you are selling your coins to a private buyer, similar to how you'd buy products from someone on Etsy or eBay.

With a P2P exchange, you can negotiate pricing and form of payment. However, many buyers and sellers on these exchanges use the current cryptocurrency pricing as a starting point for negotiations.

Some of the most popular P2P exchanges include LocalBitcoins, Paxful, LocalCoinSwap, and LocalCryptos. When comparing P2P exchanges, consider how much activity is on that platform. If the trading volume is too low, it may take too long to find the right offer, if you find one at all.

The forms of payment on P2P exchanges can vary widely. While most people prefer cash, sometimes you may find more lucrative options. Some exchanges enable you to trade your bitcoin for gift vouchers and other items of value.

No matter which payment option you prefer, you need to protect yourself from fraud. A good P2P exchange has adequate safety protocols in place to ensure a legitimate transaction occurs. For example, if you're receiving a gift card instead of cash, the gift card needs to be valid, and it must be safe from the seller using the balance after they've received your bitcoin.

To create a safer environment, most P2P exchanges verify the users to reduce fraud and scams. However, some exchanges allow users to trade without disclosing their identity. Even when this is an option, finding a trading partner can be challenging due to fraud concerns when dealing with an unverified account.

Alternate methods

Additional methods of cashing out your bitcoin are available if you know where to look. Established firms like PayPal and Cash App allow Bitcoin investors to cash out their crypto or use it to make purchases.

Bitcoin ATMs are starting to pop up around the world. These machines allow consumers to buy and sell bitcoin and store the coins and money in their wallets. Some of the most common Bitcoin ATM providers are Bitcoin Depot, Genesis, and Lamassu.

Bitcoin ATMs act very much like traditional ATMs. However, you are dealing with cryptocurrency instead of "fiat currency" (e.g., U.S. dollars), and you connect to a Bitcoin exchange instead of a bank to process transactions. You can "deposit” money (buy bitcoin) or “withdraw” money (sell bitcoin) at the Bitcoin ATM.

Unless you are in immediate need of cash, it is best to avoid Bitcoin ATMs for buying or selling bitcoin. Transaction fees range based on the provider and amount of bitcoin, but costs range from 7% to 20% of the transaction amount.

Tax impact of cashing out bitcoin

Federal government treatment and regulation of bitcoin and other cryptocurrencies are still evolving. In some ways, cryptocurrencies act like fiat money you can use to make purchases. However, in other ways, they are an investment, like a stock or a piece of art.

While the government figures that out, one thing is for sure: If you profit from cryptocurrency, you need to pay taxes on the gains. The tax rate on these gains depends on your tax bracket and how long you held before selling.

• Short-term capital gains: In general, any asset that you've bought and sold within one year is considered a short-term capital gain. Short-term capital gains are taxed at the same rates as ordinary income, like the money you make from your day job. These rates tend to be the highest tax rates and are the least favorable taxes to pay.
• Long-term capital gains: When you've held an asset for at least one year, you'll pay long-term capital gains rates on any profits that you make. The government encourages investors to hold assets for the long term for many reasons. These include minimizing panic selling, discouraging day-trading, and building wealth. As an incentive to hold for the long-term, you'll pay lower rates on gains if they've been held for at least one year. Depending on your tax bracket, your capital gains rates may be as low as 0%.

Some cryptocurrency exchanges don’t automatically provide a Form 1099, which you’ll need since you’re required to report income from cryptocurrency on your tax returns. If the exchange doesn’t provide a Form 1099, you’ll have to fill one out by adding up your bitcoin purchase and sell orders to determine your profits or losses. This can be a tedious process that may require hiring a bookkeeper or accountant, but it’s cheaper than getting in trouble with the IRS.

Failure to include your profits can result in penalties and fines for underreporting your income. With that said, there are some ways to avoid paying taxes on cryptocurrency.

FAQs

Bottom line

After you've sold your bitcoin, you can transfer the money to your bank account or reinvest it somewhere else. Transfers to your bank account may take several business days based on which payment method you chose. Be sure to save a portion of your profits. You are required to pay taxes on the gains, just like any other investment.

If you'd like to learn new strategies for investing in crypto, stocks, real estate, or other investments, read our in-depth guide on how to invest money.