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Say that I bought $5000 USD worth of Bitcoin, and a month later its value grows to $6000 USD. Now, if I were to withdraw only my $5000 USD principal worth of bitcoin, while keeping $1000 USD worth of bitcoin for further investments, am I subject to short-term capital gain taxations?

I'm currently in California, United States.

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3 Answers 3

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Yes, you absolutely are.

You're not "withdrawing" $5000, it's not a savings account.

You bought X BTC for $5K, now you have X BTC worth $6K. To get 5K out of it, you'll need to sell 5/6th of X BTC. Your basis would be 5/6th of the $5K you paid for the X BTC, and your gain would be the remaining difference (1/6th of the $5K you realized).

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  • 10
    For anyone not wanting to math, you'd owe taxes on $833.34.
    – user26460
    Commented Jul 6, 2022 at 0:47
  • 45
    I found the wording here a little unintuitive, so another way to say this: You paid $4166.67 for some Bitcoin. You sold it later for $5000, making a taxable income of $833.33.
    – user26460
    Commented Jul 6, 2022 at 0:51
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    Or this way: You didn't buy for $5,000 but for $4.166.67 and for $833.33. The value grew to $5,000 and $1,000 (well in your imagination. More likely to have dropped). You sell the $4,166,67 investment with $833,33. profit, and still have a $833.33 investment.
    – gnasher729
    Commented Jul 8, 2022 at 8:28
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    Great answer and I don't want to clutter with another - but another important point to make is that you can never "just sell the principle". That misconception is addressed, but not clearly called out - thought it was worth mentioning.
    – TCooper
    Commented Jul 8, 2022 at 19:49
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Your assets gained $6000/$5000 x 100% = 20%.

Thus, your $5000 used to be $4166.66, since 120 percent of $4166.66 is $5000.

Therefore, you gained $5000-$4166.66 = $833.34 and would owe taxes on that.

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    Isn't that the same which is also said in the other answer?
    – glglgl
    Commented Jul 7, 2022 at 11:09
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    @glglgl I found that difficult to follow and wanted to give another explanation.
    – Dave
    Commented Jul 7, 2022 at 11:30
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    @glglgl The answer isn't just $833.33, that won't help anyone else. The answer is also how you get to that number, and that can be explained in different ways.
    – gnasher729
    Commented Jul 8, 2022 at 8:30
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So you may think of it as money, but what you actually bought was a security (as far as the IRS is concerned). Let's say it was $833,333.33 per BTC when you bought it, and you spent $5000 so you got 0.006 BTC. I know that's not a realistic value, doesn't matter.

You think of it as "I took some out", but what actually happened was you sold $5000 worth of Bitcoin at the time (where it was now $1 million even per BTC), so $5000 worked out to 0.005 BTC. In the real world these numbers are a lot more uneven.

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You still own 1/6 of your BTC, or 0.001 BTC in this example. You haven't sold that yet, so you're not taxed on it yet.

So... we look at the security that you did sell. 5/6 of your buy, which in this example is 0.005 BTC. We tell the IRS about that 0.005 BTC.

  • What was the security? It is 0.005 BTC in this example.
  • What did it sell for? (the 0.005 BTC)
  • What did you pay for it? (the 0.005 BTC)
  • Dates of buy and sell (so IRS can detect errors classifying it as a short or long term gain, detect wash sales, etc)

And there you have it, your tax gain was 833.33 USD.

Oh yeah, you get to do this paperwork for every sell. Isn't short-term trading FUN?

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  • Do you know if there are any types of assets that work this way, where the "investment" and "profit" are logically separate things and the cost basis can be withdrawn without tax consequences?
    – user12007
    Commented Jul 8, 2022 at 16:31
  • @Undo: Plenty of structures where the "profit" is distributed and treated as income immediately, not as "growth" / capital accumulation. Then the withdrawal decisions are all equally taxable, so there are no consequences. Probably not what you were looking for.
    – Ben Voigt
    Commented Jul 8, 2022 at 17:10
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    @Undo I can't think of any off the top of my head, but one typical ploy is securities based lending, where you use securities you own for collateral - thus avoiding capital gains by not selling.
    – Andy C
    Commented Jul 8, 2022 at 17:37
  • @Undo Well you could always sell a synthetic long and withdraw the cash. It’s a grey area with many loopholes and many laws that close those loopholes over the years. E.g. investopedia.com/terms/s/sellagainstthebox.asp
    – Navin
    Commented Jul 15, 2022 at 5:39

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