Tax season is returning to normal in 2022 after COVID-19 led to an unusual couple of years. As a result, taxpayers have until April 18 to file and pay their taxes unless they apply for an extension. The good news is that it's easy to file for an extension to get a little extra time, although you still must make a tax payment and file for an extension by the April 18 deadline.
Let's take a look at when to use a tax extension, when the deadline is, and how to avoid any problems.
Tax season is returning to normal in 2022, meaning you have until April 18 to file for a tax extension.
What is a Tax Extension?
Tax extensions are requests for the Internal Revenue Service (IRS) to give you more time to file your tax return. By filing Form 4868 by April 18, you can move the deadline to October 17. Most extension requests are automatically honored without any explanation, and some people (e.g., military personnel serving abroad) don't even need to submit a form.
Note: This year's tax deadline is April 18 rather than April 15 due to the Emancipation Day holiday in the District of Columbia.
The most common misconception surrounding tax extensions is that it gives you more time to pay taxes. But unfortunately, you still have to make your payment (as accurately as you can estimate) by April 15, even if you file for a tax extension. A failure to make a payment on April 15 will trigger late payment penalties of up to 25% of your tax obligation.
There are several reasons to file an extension:
- Avoid late penalties. You can avoid a 5% per month late-filing penalty if you file for an extension, but you'll still owe a late payment penalty of 0.5% per month—up to a max of 25%—if you don't make a payment on April 15.
- Fund retirement plans. You can fund SEP IRAs, solo 401(k)s, or SIMPLE IRAs for the prior year until October 15 if you file for an extension. If you haven't maxed out these accounts, it's an excellent opportunity to reduce your tax burden.
- Improve accuracy. Many accountants are in a rush during tax season, so filing for an extension gives them time to ensure accuracy, make elections, and even potentially reduce tax preparation fees (during slow summer months).
While tax extensions provide more time for some things, they don't cover every line item on your tax return. For example, contributions to traditional or Roth IRAs are still due by April 15, and you cannot recharacterize IRA contributions past that deadline. There are also several other exceptions, so be sure to have a conversation with your accountant beforehand.
How to File an Extension
Many crypto enthusiasts may require extra time to prepare their taxes due to complex and evolving regulations.
Most tax preparation software makes it easy to file for an extension in a few clicks. For instance, TurboTax provides a free tax extension tool that e-files Form 4868 on your behalf. Of course, you can also manually download and complete Form 4868, but you must postmark it by April 18 to qualify for the extension, so it's typically better to e-file.
The process for filing tax extensions at the state level varies. For example, in California, residents receive an automatic filing extension to October 15, while Delaware requires residents to print and mail Form 200-EX by April 18 to request a deadline extension. Of course, just like the federal government, all states that collect income tax require payment by the April deadline.
For more information on state-specific filing instructions, TurboTax has an excellent up-to-date resource.
What If You Can't Pay Taxes?
Taxes may come as a surprise to some crypto traders and investors. For instance, suppose that you received a windfall from an airdrop and didn't realize that you owed tax on it. If you spent the money elsewhere, you might be facing a significant tax liability without the ability to pay. Fortunately, there are some options to help in these instances.
While there's no tax payment extension, the IRS does provide tools and resources for taxpayers that cannot afford their tax bills. The agency provides a self-service online payment plan to pay off your balance over time. Typical monthly payment plans come out of checking or savings accounts, but credit payments are available for smaller bills.
The penalty for unpaid or underpaid taxes is 0.5% of the tax liability every month, up to 25%. Since there are even higher penalties for failure to file, you should always file your tax return even if you cannot afford the payment. And, of course, failing to disclose crypto tax obligations comes with much higher penalties, including potential jail time.
How to Avoid Crypto Tax Problems
The IRS is becoming increasingly aggressive when it comes to enforcing crypto taxes. With the addition of the crypto question at the top of Form 1040, taxpayers that inaccurately answer "no" could face legal repercussions. Meanwhile, the agency continues to invest in blockchain analytics software and subpoena exchanges to track down tax dodgers.
While there's no doubt crypto taxes are complex, especially for decentralized finance, crypto gaming, and other cutting-edge use cases, there are software solutions that can help. These solutions can aggregate transactions across different platforms and compute tax liabilities in ways that incorporate the latest guidance from tax professionals.
ZenLedger connects to over 500 crypto exchanges and wallets, computes your capital gains and losses, and generates the forms you need, including Form 8949, Schedule 1, ScheduleD, and others. The platform also accounts for unusual transactions, such as forks, airdrops, staking, margin trading, or non-fungible tokens (NFTs).
Unlike many other platforms, ZenLedger provides Grand Unified Accounting to export transactions to Excel or Google Sheets to track "lots" to defend against any audits. You can also invite your accountant or other tax professionals to access the information if they need to coordinate crypto transactions with other parts of your financial life.
The Bottom Line
Tax season is returning to normal following COVID-19 disruptions over the past couple of years. However, if you need more time to file your taxes, you can always request an extension to October 17. You still have to make a tax payment by April 18, but the extended deadline gives you time to plan retirement contributions or ensure accuracy.
If you're looking for ways to streamline your crypto taxes, ZenLedger makes it easy to aggregate transactions and accurately compute your tax obligations.