Filing for an extension on your tax return can be a smart move for many individuals, especially those who have invested in cryptocurrency. By extending your tax return, you can file your return by October 16, 2023, instead of the original due date of April 18, 2023. This gives you additional time to gather all of the necessary information and review your data, especially if you used DeFi and NFT platforms.
Extending in General
To extend your tax return, you can file Form 4868 by the unextended due date of April 18, 2023. This can be done through a variety of tax tools or by following the instructions provided by the IRS. Keep in mind that extending your tax return does not extend your time to pay any balance due. If you expect to owe money, you must estimate this amount and pay it by April 18, 2023, to avoid late payment penalties and interest.
It’s important to note that for crypto investors, there is a lot of uncertainty surrounding key taxation issues, such as staking, lending, liquidity pools, and NFTs. As such, it might be wise to extend your tax return to await further guidance from the Treasury. Additionally, if you had deposits locked with platforms such as Celsius, Voyager, FTX, Gemini Earn, and others, it makes sense to extend your tax return to await clarity from the IRS on the tax implications of these situations.
As mentioned above, you must pay any tax due by the unextended due date of April 18, 2023 in order to avoid underpayment penalties and interest. This is generally a simple task if your only source of income is from a W-2 job as your withholding should cover any tax due and you should be able to extend without having to make additional payments.
When you have income without tax withholding, such as business income, crypto income or crypto gains, you have to make estimated tax payments and pay any balance due in full by the unextended due date. This can be difficult to estimate when business tax forms such as K-1s aren’t ready, or when a crypto trader has used many platforms and needs more time to put together their crypto taxes. Taxpayers are advised to estimate their income conservatively and overpay the extension payment when in doubt. This will ensure a timely payment and any overpayment can be refunded or applied to a (timely) first quarter estimated tax payment for the following tax year.
The following is a general checklist that you can use to make sure that your extension payment covers all your income and you are not subject to any late payment penalties and interest.
- Gather all tax documents received as well as a copy of your last tax return
- We recommend entering as many of your tax forms (W-2, 1099s, K-1s, etc) into your tax tool of choice.
- Compare your tax return to your prior year return, and identify any income that you had last year but you have not accounted for in your tax return. Often-times K-1s from partnerships and S-corporations can get delayed due to extended business filing times. Estimate this income to the best of your ability, and when in doubt use the prior year as a baseline.
- If you are not done with your crypto portfolio on accointing, we recommend at least setting up your wallets and reviewing your largest transactions. Run a tax report and use this as an estimate of your capital gains (make sure to include short and long term) and your crypto taxable income (staking, hard forks, airdrops, etc). Any unreviewed transactions will impact your tax report, so keep this in mind when using as an estimate. When in doubt, you can overstate your gains and play it safe. Keep in mind that if you have an overall capital loss, you can only deduct $3,000 of this against other ordinary income so knowing that can save you some time for extending.
- Run through your tax return and make sure that you have accounted for all known taxable income, and either entered your tax forms or estimated, to the best of your ability your income.
- Make sure to review that your payment information, whether through tax withholding, estimated tax payments or a prior year overpayment applied to the current year, is accurate. If you do not input the correct amount of payments, your extension payment will be incorrect and you could be subject to late payment penalties and interest.
- You should have a semi-completed tax return showing your taxable income, tax, payments and balance due or overpayment.
- If you have an overpayment, you do not owe an extension payment. You can simply file Form 4868 with a few clicks, or by mailing to the address based on the instructions from the IRS.
- If you have a balance due and you have income subject to estimated tax payments for the new tax year, we recommend that you include any first quarter estimated tax payment with your Form 4868 that you are extending. This will ensure you are overpaying your balance due for extension, and any overpayment on your tax return will be considered a timely first quarter payment for estimated tax purposes.
- If you have a balance due and you do not have any taxable income subject to estimated tax payments in the current tax year, just make sure to cover the balance due and submit the payment for the current tax year.
- Please make sure to verify with your state department of revenue whether it follows the federal extension or requires its own extension. You will generally also need to pay any balance due for your state and make a first quarter payment.
While most states will grant you an automatic extension with your Federal extension, there are a couple of exceptions. Furthermore, if you expect to owe state taxes, you will generally have to pay the balance due to the state by the unextended deadline, so in cases in which you owe, you might be filing a state extension payment at the unextended deadline. Your tax tool of choice should be able to help you file your state extension payment, if needed.
For additional information on filing your crypto taxes, including 1099 questions, attachments and filing with multiple tax tools, check out our Crypto Tax Filing Guide 2023.
The information contained in this guide, including any supplemental materials, is for general information purposes and does not constitute financial, investment, legal or tax advice. The present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.