Filing an IRS tax extension for your crypto gains and income grants you an additional six months to file your tax returns, during which you can collect and organize all your transaction records and supporting documents to report your taxes accurately.
But why would you need a tax extension?
Tax season can be overwhelming, especially when dealing with crypto transactions.
If you find yourself needing to file for a tax extension but don’t know where to start, worry not. This guide will help you navigate when and how to file for a tax extension while helping you avoid common pitfalls and misconceptions.
What is an IRS Tax Extension?
Put simply, an IRS tax extension grants taxpayers an additional six months to file their tax returns, moving the deadline from April 15th to October 17th. It can be a lifesaver for people who need more time to organize their transaction records, navigate the complexities of DeFi, and calculate their crypto gains and income accurately.
It’s important to note that while an IRS tax extension gives you more time to file your taxes, it does not grant an extension for paying any taxes owed. The payment deadline still remains April 15th, and failure to pay by this date can still result in penalties and interest charges. More on this later.
Penalty for Not Filing your Taxes Before the Deadline
Failing to file your taxes before the deadline can lead to a failure-to-file penalty, ranging from 5% to 25% of your unpaid taxes for each month or part of a month your tax return is late. Moreover, it doesn’t stop there—the IRS also charges interest on unpaid taxes, compounding the financial burden over time.
Let’s consider an example to understand why filing an IRS tax extension for your crypto gains and income is crucial if you can’t file your taxes before the deadline.
Suppose you owe $10,000 in taxes and fail to file your tax return for four months. With a 5% monthly penalty, you could be looking at an additional $2,000 in penalties, making your total tax liability soar to $12,000. Additionally, the interest charges on unpaid taxes (including the penalty amount) will continue to accumulate until the outstanding balance is settled.
Learn more about other crypto tax penalties here.
When to File a Tax Extension for your Crypto Gains and Income?
Whether you’ve started preparing for taxes late, encountered complex crypto transactions, or have other reasons impeding your ability to meet the original filing deadline, opting for a tax extension in the following scenarios may be the most beneficial or even necessary move you can make.
Late Start in Tax Preparation:
Life can get hectic, and sometimes tax preparations can end up taking a backseat. Filing an IRS tax extension for your crypto gains and income provides the much-needed breathing room to meticulously organize your transaction records and necessary documents, ensuring accurate reporting without rushing through the process.
Complex Crypto Transactions:
The crypto landscape is ever-evolving, and with it comes new and intricate transaction types like staking, liquidity pools, yield farming, and other DeFi activities.
By filing a tax extension, you gain extra time to research these gray areas of crypto taxation, seek professional advice if needed, and ensure that you report these complex transactions correctly.
Unforeseen Circumstances or Other Reasons:
Life is unpredictable, and sometimes, life throws curveballs. It could be a medical emergency, family obligations, or other unforeseen challenges. Filing a tax extension offers flexibility during challenging times, allowing you to focus on pressing matters while alleviating the stress of immediate tax obligations.
How to File a Tax Extension for your Crypto Gains and Income?
Filing a tax extension for your crypto gains and income is mostly a straightforward process, depending on which of the following method you choose:
The IRS allows you to submit your tax extension request quickly and securely through their online free-file system.
For those who prefer the traditional approach, paper filing using Form 4868 is another option. Form 4868, the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, can be filled out manually and mailed to the IRS before the original tax filing deadline.
Crypto Tax Software:
If you’re a crypto investor or trader, using specialized tax software like Bitcoin.Tax can be the easiest and most convenient way to file your tax extension. These platforms are designed specifically to handle crypto-related tax reporting and provide direct options to file extensions.
A Tax Extension Isn’t a Tax Payment Deadline
Many individuals mistakenly assume that filing an extension also buys them additional time to settle their tax bill. But as mentioned, a tax extension only provides extra time to file your tax return. You must still pay your taxes before the original deadline. If you don’t, you can face penalties and interest charges.
Penalty for Not Paying your Taxes Before the Deadline
If you don’t settle your tax liability on time, you may face the failure-to-pay penalty, which amounts to 0.5% of your unpaid taxes for each month or part of a month that the tax remains unpaid, and it can go from 0.5% to 1% if you don’t pay your taxes within 10 days of receiving a notice from the IRS.
Check out the official guidelines of the IRS on failure-to-pay for more nuanced and intricate details.
Exceptions and Special Rules
If you are living outside the United States or serving in the armed forces, you may be eligible for special extensions to file your tax return and pay your taxes. Here is what you need to know:
Living Outside the U.S.:
Firstly, suppose you are a U.S. citizen or resident alien, and your main place of business or duty is outside the U.S. and Puerto Rico. In that case, you automatically receive a two-month extension to file your return and pay any federal income tax due. While no formal request for an extension is required, attaching a statement explaining your situation is required.
Combat Zone Extension:
For those serving in the armed forces in a combat zone or on deployment outside the U.S. while participating in a contingency operation, there are specific provisions that automatically extend the tax filing and payment deadlines.
The extension lasts for 180 days after the last day of your service, or if you experience continuous qualified hospitalization for a service injury, the 180-day extension begins from the last day of such hospitalization. Furthermore, the number of days you had left to file your taxes before entering service is added to the 180-day extension.
If you qualify for these extensions, make sure to include the necessary statements or documentation when filing your tax return.
How to Pay Taxes After Filing A Tax Extension for your Crypto Gains and Income?
As mentioned, even after successfully filing a tax extension for your crypto gains and income, you must still pay the taxes you owe to the IRS.
But the very reason for filing an extension in the first place is often the lack of complete transaction records and supporting documents, making it difficult to accurately calculate your tax liability.
So, the question remains: How do you go about paying your taxes after filing an IRS tax extension? Here’s how.
Use a Crypto Tax Software
Crypto tax software, like Bitcoin.Tax, can automatically collect and organize all your crypto transaction data from various exchanges and wallets into a centralized dashboard. With everything in one place, you can get a pretty accurate estimate of what you owe to the IRS.
But that is just step one. Step two is overestimating and overpaying.
Overestimate and Overpay
After estimating your tax liability with the help of a crypto tax tool, it’s better to err on the side of caution and pay slightly more than what you anticipate owing. By paying a little extra, you can avoid potential penalties for underpayment.
And guess what? If you pay more than you owe, the IRS will send you a tax refund. So, you actually don’t lose any money.
Remember to keep detailed records of your payments and important documents, as it will help speed up the refund process if you’re eligible for one. Plus, it’s good to have solid proof of your compliance if questions arise down the line.
How do I file a return after the due date?
Filling a return after the due date follows the same process as filling an on-time return – gather your financial information, choose the appropriate tax forms, prepare your return using software or a professional, include an explanation for filing late, submit your return electronically or by mail and remember to pay any taxes owed.
Is there a penalty or cost for filing an extension?
No. There are no penalties or costs for filing a tax extension with the IRS.
Will filing a tax extension increase my chances of being audited?
Filing a tax extension does not increase the likelihood of the IRS auditing you. The IRS conducts audits based on specific criteria, not simply because you filed an extension. As long as you accurately report income, claim valid deductions, and follow tax laws, filing an extension should not raise your audit risk.
How do I estimate my tax liability when filing a tax extension for crypto gains and income?
To estimate your tax liability after filing a tax extension for crypto gains and income, start by using a crypto tax software like Bitcoin.Tax. It automatically collects and organizes your crypto transaction data, giving you a pretty close estimate of what you owe the IRS.
Step two is to overestimate and overpay your taxes. By paying slightly more than your estimate, you can avoid penalties for underpayment. And if you do pay more than you owe, you can always claim a refund.
Keep detailed records for a smooth refund process and proof of compliance if needed.
Can I amend my tax return filed after a tax extension?
Yes, you can still amend your tax return even if you filed it after a tax extension. If you realize that you made errors or need to make changes to your original return, you can file an amended tax return using Form 1040-X.
The form allows you to correct any mistakes, update information, or include additional details that may have been previously not reported. Note that the deadline for filing an amended return is typically within three years from the original due date or two years from the date you paid the tax, whichever is later.
Remember to include all necessary supporting documentation and explain the changes made on the amended return.
What happens if I don’t report crypto gains to the IRS?
You can face serious consequences, including penalties, fines, and even legal action if you fail to report your crypto gains to the IRS. The IRS considers crypto as property for tax purposes, which means gains made from their disposals are subject to taxes. Not reporting these gains is a form of tax evasion.
Check out our complete guide on crypto taxes in the US to know how the IRS tracks down crypto investors evading taxes and potential crypto tax-saving strategies.
Can I use tax software to file a tax extension for my crypto taxes?
Yes, many crypto tax software, including Bitcoin.Tax, allows users to file for a tax extension directly from their platform with just a few clicks.