How to File a Tax Extension in 2024

A tax extension gives investors more time to properly assemble their tax returns (until October 15 in the US)

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.

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 15 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. 

There are two ways you can file for an extension:

1. Your accountant or crypto tax filing software can file your extension for you. 

2. If you pay your estimated taxes via the IRS’s Direct Pay, EFTPS, or credit/debit card payment page, the IRS can extend your tax filing deadline automatically.

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.

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 overestimate: if you overpay, you will receive back the extra amount after filing. 

Inversely, you may have interest and penalties on unpaid taxes if you underestimate.  

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 the 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. 

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.

What happens if you cannot make a payment on time

There are two different potential penalties for not meeting the April 15 deadline. The failure-to-file penalty can be up to 5% per month for a maximum of 25% but will not apply as long as you file an extension and file by the October due date. The failure-to-pay penalty will still be assessed with an extension, as your payment is due by the deadline.

The failure -to- pay penalty is .5% of the balance due up to a maximum of 25%. In addition to the penalties, interest is charged until the balance is due. The current rate for the first two quarters of 2024 is 8% but can change quarterly. In short, it can be costly to not file and pay on time.

We'll will file your extension for free if you have TokenTax file your tax return. When in doubt, consult with a crypto tax professional for guidance.

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.

Tax filing extensions and crypto taxes FAQs

What is a tax filing extension, and why would I need one?

A tax filing extension provides investors additional time, until October 15 in the US, to assemble and file their tax returns, particularly for complex situations like DeFi tax reconciliations or margin trading. However, it's important to note that the extension only extends the filing deadline, not the payment deadline. Taxes owed must still be paid by the original April deadline, even if it's just an estimate.

When should I consider filing a tax extension, and what are the benefits?

Filing an extension is generally not advisable but can be recommended when complex reconciliations, such as DeFi or margin trading taxes, require more time. Additionally, if you start working on your crypto taxes close to the deadline, it's prudent to file an extension to account for unexpected complexities. The extension helps avoid the "failure-to-file" penalty, and making an estimated payment with the extension can prevent a "failure-to-pay" penalty.

How can I estimate my tax liability if my capital gains calculations are not ready?

Several methods exist to estimate tax liability, including calculating gains based on changes in cryptocurrency holdings' fiat value over the year or using preliminary TokenTax estimated tax liability as a starting point. It's recommended to be conservative in estimates, considering overpayment results in a refund, while underestimation may lead to interest and penalties on unpaid taxes.