If you’re new to the world of cryptocurrencies, you may be wondering how to cash out Bitcoin. After all, even the most epic gains don’t mean much if you can’t convert your digital currency holdings back into dollars and buy a real-world Lamborghini.
Keep reading as I share your various options for cashing out. You’ll learn:
- the steps involved in cashing out Bitcoin
- how to avoid getting scammed when cashing out Bitcoin
- who determines the value of Bitcoin when you sell
- the tax implications of selling Bitcoin
- questions you should ask before cashing out Bitcoin
The simplest way to cash out Bitcoin
You can cash out Bitcoin within minutes using a cryptocurrency exchange.
Cryptocurrency exchanges, in case you’re unfamiliar, are websites that connect people looking to buy Bitcoin with people looking to sell it. Popular cryptocurrency exchanges include:
Here are the steps involved in selling Bitcoin on an exchange.
Step 1: Make an account on your exchange of choice
Anyone who owns Bitcoin likely already has an account on an exchange. They would’ve used that account to buy Bitcoin.
However, if you’re completely new to Bitcoin (i.e. someone would like to gift or pay you using it), you’ll need to create an account.
I recommend researching the exchanges I listed in the previous section. Look for one that provides service in your country and can facilitate the type of withdrawal (i.e. wire, electronic funds transfer, etc) you’d like to do.
I’ve personally used Coinbase more than any other exchange. It serves customers in both Canada and the United States. It’s also the most beginner-friendly Bitcoin exchange I’ve come across in four years of exploring the cryptocurrency space.
One thing to note is that most cryptocurrency exchanges (including Coinbase) require identity verification before you’re allowed to transact large amounts. You’ll typically have to provide your driver’s license (or some other form of identification) and wait a few business days. This process is in place to inhibit criminal activity (including tax evasion) on exchanges.
Step 2: Send your Bitcoin to your exchange wallet
This is the most potentially dangerous part of the entire process so read carefully and take your time.
When you create an account on a Bitcoin exchange, you’ll receive (typically automatically) what’s known as a Bitcoin wallet. This is akin to a checking account in that you can send and receive money through it.
In this step, you’ll need to send your Bitcoin to your exchange wallet.
Start by retrieving your wallet’s public key (also known as its address), which should be easily accessible through the exchange’s website. Use this key to set up a transaction from wherever your Bitcoin currently is to your exchange wallet.
If someone is sending you Bitcoin (i.e. as a gift or payment), give them your public key so they can set the transfer up.
Before you confirm the transaction or give your public key to whoever will be sending you Bitcoin, make sure the value you’ve pasted from your clipboard matches what you see in your account.
One of the most common cryptocurrency scams entails swapping this value for a hacker’s public key. Your Bitcoin would then end up in their wallet.
It’s also possible you might miss a character when you copy the public key, in which case your Bitcoin would end up in a stranger’s wallet or simply be lost (which has happened to me before). Either outcome is irreversible.
That’s why you should always double-check whenever you copy and paste your Bitcoin wallet’s public key.
Step 3: Sell your Bitcoin for cash
Once your Bitcoin is in your exchange wallet, you can sell it for cash.
This process typically entails identifying how much Bitcoin you’d like to sell and naming your desired price for it (i.e. the current market rate or some higher amount).
Once your exchange identifies a user willing to buy your Bitcoin, the transaction will go through. You’ll receive their cash in exchange for your Bitcoin.
If you opted to sell your Bitcoin for market value, this should only take a few seconds. If your desired price is above market value, you’ll need to wait until someone comes along who’s willing to pay that much.
Step 4: Connect your bank account to your exchange account
Next, you’ll need to share banking details with your Bitcoin exchange.
If you’ve ever connected PayPal to your bank account, this process should be familiar. You’ll typically provide basic information (i.e. your account and routing numbers). Your Bitcoin exchange will then verify the details and update you when your bank account has been connected successfully. The process typically takes a few business days.
Step 5: Set up the withdrawal from your exchange account to your bank account
Once your bank account has been successfully connected to your cryptocurrency exchange account, you’ll be able to set up your withdrawal. You’ll typically just need to select the amount of cash you’d like to withdraw, confirm, then be on your way.
Cryptocurrency exchanges will generally transfer the money within one or two business days, after which your bank will process the transaction before those funds become available in your account.
Tips for avoiding unpleasant surprises when cashing out Bitcoin
Now that you know how to cash out Bitcoin, here are a few general tips for avoiding unpleasant surprises before, during, and after the process.
Always verify you’re on the legitimate cryptocurrency exchange website before entering private data
There are many phishing websites designed to steal your private keys and cryptocurrency exchange login information.
Thankfully, avoiding these scams is easy if you only ever visit your cryptocurrency exchange website by manually typing the URL in your browser’s address bar (or using its dedicated mobile application). Conversely, you should never log into a cryptocurrency exchange by following a link from a third party (i.e. a blog, email, or Telegram message). Even legitimate sources can be hacked.
Enable two-factor authentication for your cryptocurrency exchange login
You can also secure your cryptocurrency exchange account by implementing two-factor authentication. That way, even if someone steals your password, they won’t be able to log in unless they’ve stolen that other device as well.
Pro-tip: Avoid text-based two-factor authentication. Hackers can use a strategy known as SIM swapping to intercept text messages, including two-factor authentication methods. This exact thing happened to me once. The hackers were able to access my Coinbase account and make a transaction attempt. It was only my bank’s suspicious transaction detection that stopped me from losing lots of money.
Rather than using text-based two-factor authentication, visit your mobile phone’s app store and find a dedicated application (I use 2FAS Auth). These applications only work on your device; nobody can access those codes remotely.
Keep in mind cashing out Bitcoin may be a taxable event
Many developed countries (including Canada and the United States) view Bitcoin as an asset. Exchanging Bitcoin for more cash than you paid to acquire it is consequently considered a taxable event in these countries.
Depending on the amount you’re cashing out, your bank may even have a legal obligation to report the transaction.
Consequently, I strongly recommend running some rough tax calculations before cashing out Bitcoin. Once the money hits your bank account, consider setting an appropriate amount aside so you won’t get caught off guard when tax season rolls around.
I think it’d also be a good idea to consult a tax professional with experience handling cryptocurrency-related returns.
You should understand the basic mechanics of exchange traded assets before cashing out Bitcoin
Buying and selling assets on exchanges isn’t rocket science. It can certainly feel like it, though, given how many steps are involved in setting these transactions up. Check out the U.S. Security and Exchange Commission’s guide to the various types of trades you can make here. It provides a great overview of your options and how they might affect the amount of money you ultimately receive.
You don’t want to be one of those noobs who sets a limit order instead of a stop loss and accidentally loses a bunch of money (which has happened to me before, whoops).
Research your bank’s policy on Bitcoin withdrawals before cashing out
Some banks are very antagonistic towards Bitcoin. If they see an incoming transaction, they may start asking questions about where the money came from. Some users (like this poor guy) have even reported their banks freezing their assets while investigating even relatively small Bitcoin transactions.
Avoid nasty surprises by researching your bank’s stance on cryptocurrency before sending money there from a cryptocurrency exchange.
How to cash out Bitcoin: Conclusion
I hope this article has helped you understand the steps involved in cashing out Bitcoin safely. For more of my articles on the topic of investing, click here.