How You Can Get More Time To File Your Crypto Taxes?

What happened

Dealing with cryptocurrency, NFTs & DeFi can make your simple tax return surprisingly complex. As a result, taxpayers often need more time than other years to compile tax records and prepare tax returns accurately.

2021 tax filing due date is today. If you are running out of time, you can get additional six months to file your taxes if you properly apply for a tax extension with the IRS today. If you do not file a tax return or file for an extension by today, you could be subject to penalties such as late filing and late payment penalties.

Key Concepts

What is an Extension?

In simple terms, an extension is a special tax form (Form 4868) you can file with the IRS requesting additional time to file your individual tax return. As the name suggests, a tax extension extends your tax filing due date from April 18th, 2022, to October 17, 2022. If you had complex crypto & NFT transactions during 2021 and are running out of time to reconcile your activity, an extension may be a good option for you to consider.

How to File for an Extension?

Filing for an extension is a three-step process.

First, you have to estimate how much taxes you owe for the 2021 tax year. To estimate your taxes, enter all the tax forms (W-2, 1099, etc.) you have received into a tax software of your preference. Next, estimate your cryptocurrency gains (or losses). You may not know how much gains you had on trading cryptocurrency during 2021 because you are still in the process of reconciling your records. In this case, you can estimate a reasonable amount as your profits and enter it into your tax program for extension purposes (all you are trying to do here is estimate your tax liability).

Second, subtract taxes you have paid towards the 2021 tax year. If all of your income comes from employee wages, the amount of tax you have paid towards 2021 will be on Box 2 (Federal income tax withheld) of your W-2. If you are a self-employed individual or have a business, you might have paid quarterly taxes to the IRS throughout 2021. Enter these amounts in your tax software.

Third, complete and file a Form 4868 (Application for Automatic Extension of Time) with the IRS on or before April 18th, 2022. The Form 4868 is a relatively simple form to fill out.

Part I requires you to enter your personal identification information. Part II can be filled out by following the first and second steps we went through above.

An extension can be submitted to the IRS in three ways. The easiest way to submit one is by using IRS’s Direct Pay link. Make sure to pick “Extension” under the “Reason for Payment” field.

Alternatively, you can also fill out the PDF Form 4868 and mail out to the IRS or use a DIY tax software tool to file it electronically.

An Extension Doesn’t Give You Additional Time to Pay Taxes

It is very important to know that a tax extension only gives you additional time to file your tax return; it does not give you additional time to pay your 2021 tax liability.

For example, say you estimated that you owe $10,000 for 2021 tax year because you had some capital gains coming from NFT trades. In this case, you have to pay $10,000 to the IRS when you file your Form 4868 on April 18, 2022. However, you can file your Form 1040 (U.S. Individual Income Tax Return) any time before October 17, 2022, because you filed for an extension.

What If You Overestimate or Underestimate Taxes?

Since you are estimating taxes when filing for an extension, it is possible for you to overestimate or underestimate your 2021 tax liability. If you overestimate taxes and

pay more taxes than necessary with your extension, the IRS will refund you the excess taxes paid when you actually file your tax return.

If you underestimate your taxes and pay less taxes than required, you will have to pay the shortage when you actually file your tax return. Unfortunately, here, you will have to pay late interest and penalties because this amount should have been paid by April 18, 2022. Therefore, it is prudent to be more conservative when estimating your tax bill for extension purposes.

Misconceptions with Extensions

Dealing with cryptocurrency, NFTs & DeFi can make taxpayers’ simple tax profile surprisingly complex. These taxpayers naturally need more time to reconcile their crypto activity. In fact, crypto can lead you to file your very first tax extension. Some taxpayers falsely believe that filing their tax return after the Tax Day could increase their chances of being audited. Just know that submitting an extension and filing taxes after April 18th has no impact on your probability of being audited.

Moreover, you aren’t required to tell the IRS why you need more time to file your taxes. As a long as you pay your tax liability by the Tax Day with an extension, the IRS has no issue with you taking few more months to actually file your tax return. As a matter of act, in the 2021 tax filing season, approximately 60 million returns were filed after the Tax Day.

Next Steps

• File for a tax extension if you can’t file your final tax return by April 18^th, 2022.

Further Reading