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Guide to Estimated Quarterly Taxes for Crypto
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If you expect to owe more than $1,000 in taxes after withholding, you probably need to be paying estimated quarterly taxes.
Underpaying or failing to pay your quarterly taxes can result in interest and penalties. To avoid this, try to follow the safe harbor rule when estimating your payments.
For the IRS, taxes are “pay as you go.” Put simply, this means the IRS wants to take its share of your income as soon as you’ve earned it.
Hence, if you’re an employee of a company, you have a portion of each paycheck withheld for federal income tax. Typically, this means that you don’t have a large income tax bill at the end of the tax year. In fact, often taxpayers will receive a refund.
However, if you are self-employed or have a sizable amount of income that does not come from an employer, taxes are not withheld from your earnings. Because the IRS wants what it’s due, it requires taxpayers in this situation to pay quarterly estimated taxes.
Many crypto traders fall into this category, but are unaware that they should be paying crypto estimated taxes. In this guide, we’ll outline who needs to pay quarterly taxes as well as how to calculate your estimated tax payments.
Who needs to pay estimated quarterly taxes for crypto?
The IRS writes that if the following criteria apply to you, you need to pay quarterly estimated taxes:
You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and tax credits.
You expect your withholding and tax credits to be less than the smaller of: a) 90% of the tax to be shown on your current tax return, or b) 100% of the tax shown on the last year's tax return. Your last tax return must cover all 12 months.
The IRS provides the decision tree below:
Thus, if you fall into one of the categories below AND expect to owe more than $1,000 in taxes, you may need to pay quarterly:
Investors with income from interest, staking, and rewards
Investors with capital gains
We recommend speaking to a crypto tax professional.
How to calculate estimated quarterly taxes for crypto
IRS Form 1040ES is a worksheet to help taxpayers calculate their estimated tax. If any of your crypto income is from self-employment (mining cryptocurrency, working as an NFT artist or dealer, etc), the form will also help you find what you owe in self-employment taxes, which amounts to 15.3% of your net income and covers Social Security and Medicare taxes.
While these crypto tax calculations are relatively simple, many taxpayers are unsure how to estimate how much they will earn throughout the year. Typically, quarterly estimated taxes are paid in four equal payments. However, crypto investors may find themselves needing to change their payment amount if they experience a significant change in financial circumstances.
What is the "safe harbor rule"?
Underpaying your estimated taxes may result in a penalty. However, there is a “safe harbor,” or room for error when paying your estimated taxes. The safe harbor range varies by income level.
Income of $150,000 or less: You will not be assessed penalties for underpayment if your estimated tax payments amount to 90% or more of your current year liability, or 100% of last year’s liability, whichever is smaller.
Income more than $150,000: You will not be assessed penalties for underpayment if your estimated tax payments amount to 110% of your last year’s tax liability, or 100% of your current year liability, whichever is smaller.
Note that if you pay your full estimated tax liability, but you miss a payment deadline, you may still accrue late-payment interest.
When are quarterly payments due?
There are four deadlines for estimated tax payments:
For income received Jan. 1 through March 31, estimated tax is due Apr. 15.
For income received April 1 through May 31, estimated tax is due Jun. 15.
For income received June 1 through Aug. 31, estimated tax is due Sep. 15.
For income received Sept. 1 through Dec. 31, estimated tax is due Jan. 15.
You can pay quarterly taxes by submitting payment and the Form 1040ES through the mail, or simply pay online.
If you miss one of these deadlines, you should pay the IRS as soon as possible. Penalties and interest accrue the longer you delay payment. Under some circumstances, for example if it is your first penalty, you may be able to apply for penalty relief.
If I've paid quarterly taxes, what do I report on my annual taxes?
If you’ve paid your quarterly taxes, you’ll still need to file your yearly crypto tax returns. The Form 1040 includes a line for you to report the estimated tax payments you’ve made. These are applied to your final balance. If you’ve calculated your estimated taxes properly and submitted them on time, you should have low or no balance and potentially a refund.
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