How to File a Tax Extension
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A tax extension gives investors more time to properly assemble their tax returns (until October 16th in the U.S.)
If you file for a tax extension, you must still make an estimated tax payment by the April 18th deadline.
What is a tax filing extension?
An IRS extension allows you to file your tax return after the April tax deadline, giving you until the October extension deadline to file.
However, payment is still required by the April deadline. When you file an extension, you get more time to file your crypto tax return, but you must still make a payment of taxes owed, even if it’s an estimate.
Should I file an extension?
Filing an extension gives you more time to properly file your tax return..
Situations where an extension may be necessary include:
DeFi tax reconciliations: these reconciliations take more time due to the interconnected and rapidly developing nature of DeFi.
Margin trading taxes: many cryptocurrency margin trading platforms require a more intensive PnL reconciliation by TokenTax’s team; this can take a few weeks. If you begin working on your crypto taxes close to the deadline and traded on margin / futures, you may want to consider filing an extension.
Last minute considerations: if you begin working on your crypto taxes within a few weeks of the April 18th deadline, be ready to extend if necessary. It’s good to have sufficient time in case there are extenuating circumstances regarding your data or cryptocurrency tax situation.
If you properly file an extension and make a tax payment, there’s no downside to filing an extension.
How to file an extension
There are two ways you can file for an extension:
Your accountant or crypto tax filing software can file your extension for you.
How to make a tax payment
It’s a simple process, and you can make the payment yourself without assistance from a CPA or accountant. You would make your payment via the IRS’s Direct Pay, EFTPS, or credit/debit card payment page and mark that payment as an extension.
Methods to estimate your tax liability if your capital gains calculations aren't ready yet
Many cryptocurrency taxpayers file an extension to get more time for the reconciliation process. In this case, the tax to be paid may need to be estimated by other means before reconciliation is complete.
There are a few different methods for determining an estimated crypto payment. It’s okay to be conservative and over-estimate: if you overpay, you will receive back the extra amount after filing.
Inversely, if you underestimate, you may have interest and penalties on unpaid taxes.
1. Estimation based on holdings value change over the year
The most basic method you can use to estimate your tax liability is to take the fiat value of your cryptocurrency holdings at the beginning of the tax year and subtract that from the fiat value of your holdings at the end of the tax year.
For example, if your cryptocurrency holdings were worth $20,000 at the beginning of the year and $100,000 at the end of the year, you could estimate a gain of $80,000. If your short-term crypto capital gains tax rate is 24%, then you could estimate a tax payment of $19,200.
Note that this method of calculation is just an estimate; your total capital gains as reported on the Form 8949 will likely differ due to how cryptocurrency taxes are calculated.
This method works best if you’ve held cryptocurrency all year. If you sold a large amount into fiat and didn’t buy back in, then you may want to consider adding the cashed out value to your end-of-year value.
This may be an underestimate if you sold long-term holdings at a gain. For example, if you bought ETH at the ICO price in 2014 and sold these tax lots in 2020, your gains will be higher than simply the change in ETH value over the current year.
2. Estimation based on preliminary TokenTax estimated tax liability
If you are using TokenTax, you can also use your preliminary TokenTax estimated liability as an anchor and then modify that amount based on some assumptions about your account.
For example, if you are missing cost basis on key sales, but can reasonably assume what the capital gain or loss is on these sales, then you can incorporate this assumption into your estimation.
Alternatively, you can use your own estimates of your total gains and income for the year in your estimation.
The benefits of filing for an extension
An extension is not an extension to pay taxes due, but rather an extension of time to file. An extension can help avoid the “failure-to-file” penalty. To avoid a "failure-to-pay" penalty, we recommend making an estimated payment with your extension. Interest on balances due will be charged with or without an extension.
The interest on your balance will be about 0.5% per month. However, it would be a 5% penalty if you do not file an extension and pay late.
What happens if you cannot make a payment on time
Let’s look at two approaches you can take if you owe the IRS $10,000 but cannot pay:
Scenario 1: Don’t file an extension. You would owe a 5% penalty immediately plus the 0.5% monthly interest. If you pay on October 16th, your tax bill would be $10,800 ($500 immediate penalty plus the 0.5% interest for 6 months).
Scenario 2: File an extension. Since you only owe the monthly interest, your tax bill will be $10,300.
In this scenario, you save $500 simply by filing an extension. We'll file your extension for free if you have TokenTax file your tax return.
2024 Tax Extension Deadline
The deadline to file a federal income tax return for 2023 is April 15, 2024. If you require more time, you can file IRS Form 4868 to extend your filing deadline to October 15, 2024.
Note that while this extension grants you additional time for paperwork, tax payments are still due by April 15, 2024, or you may face penalties on unpaid taxes.
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