Most people complete their taxes before the April 15th deadline, but if you need more time, the IRS lets you file for a six-month extension. And since crypto taxes can be complicated, it’s not uncommon for investors or traders to file for an extension to ensure everything is in order. (Of course, you still must pay an estimate of how much you’ll owe on time!)
If you received an extension but haven’t filed your tax return, this article will examine tax extensions and answer some of the most common questions about the October 16 deadline.
Tax Extensions & Penalties
Let’s start with a review of how tax extensions work and the penalties you may incur if you don’t file or pay your taxes on time.
You can request an extension by filing Form 4868, “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” After submitting the form online or mailing it in, the IRS will automatically grant you a six-month extension to file your return. You then have until October 16th to complete and file your tax return.
It’s critical to note that a tax extension only gives you more time to file – you still must pay your taxes by April 15th. If you don’t know how much you owe, you must estimate your tax liability as accurately as possible. And if you don’t pay at least 90% of what’s due by the original date, you may be subject to a late-payment penalty and interest on the unpaid amount.
The IRS issues three different types of penalties:
- Failure-to-File – The failure-to-file penalty amounts to 5% of the unpaid tax liability each month the tax return is late, up to 25% of the balance due.
- Failure-to-Pay – The failure-to-pay penalty equals 0.5% of the unpaid tax liability for each month the taxes are unpaid up to 25% of the outstanding balance.
- Interest – The IRS charges interest on any unpaid balance, equal to the federal short-term rate plus 3% for most individuals.
If you have both a failure-to-file and a failure-to-pay penalty, the failure-to-file penalty will be reduced by the failure-to-pay penalty, resulting in a 4.5% monthly penalty.
It’s also important to note that the IRS continues to dedicate more and more resources to crypto tax enforcement. For instance, the agency has subpoenaed several exchanges to identify tax dodgers and recently hired new agents. Therefore, it’s essential to ensure that you pay and file on time, as well as accurately report your transactions to avoid any troubles down the road.
What If You Need More Time?
The IRS doesn’t allow automatic extensions beyond the October 16th deadline.
However, if you need more time, you can write a letter explaining why you need an additional tax extension and mail it to the same address on Form 4868 under the heading “Where to File.” The IRS only approves requests for other tax extensions in cases of undue hardship, and it’s a good idea to submit this request as early as possible to avoid penalties.
What Happens If You Miss the Deadline?
Missing the October 16th deadline will trigger a failure-to-file penalty.
The penalty for filing late (5% monthly) is significantly higher than the penalty for not paying on time (0.5% monthly). So, it’s essential to try and file your taxes on time, even if you cannot afford to pay them. If you file even a day after the deadline, you will owe 5% more than you would otherwise on any unpaid tax balance!
Is the Deadline at Midnight?
Yes, the October 16th deadline is at midnight local time.
If you file electronically, it’s a good idea to try to file a little before midnight in case there’s high traffic on the IRS website or other electronic filing systems. If you use postal mail, you should ensure your return gets postmarked by October 16th. Getting a receipt or confirmation to prove you sent the return on time is also a good idea.
What About State Extensions?
Many states automatically extend the state tax filing deadline if you’ve filed for a federal extension. However, that’s not the case for every state, so it’s important to check with your state tax agency for specific details.
Like a federal extension, most states require you to pay any taxes owed by the original due date regardless of whether you’ve filed an extension. Failure to file or pay state taxes on time may result in interest and penalties.
What If You Can’t Pay Your Balance?
The IRS provides several resources if you cannot pay your tax balance.
If you need short-term relief (less than 120 days), the IRS offers installment agreements, an offer in compromise, or a temporary delay in collection. You can use the Online Payment Agreement application to request an installment agreement if you owe less than $50,000 in combined tax, penalties, and interest. Otherwise, if you owe more, you must complete Form 433-A.
Installment agreements are subject to interest charges, but the agency may be able to waive penalties if you have a good reason for being unable to pay.
What Documents Do I Need?
Start by gathering the transaction data you may need from your wallets, exchanges, and other platforms you may use. If you’re not using a tool like ZenLedger, you may have to export CSV files from these sources and combine them into a single spreadsheet, sorted by transaction dates and times, to accurately compute your gains and losses.
These documents may include:
- Exchange Statements
- Wallet Records
- Transaction Histories
Using the data from these documents, you may need to file several forms with the IRS, depending on your situation. For instance, many crypto investors may only need to file Form 1040 Schedule D and Form 8949, but those trading as a business may need to file a Schedule C if they are reporting transactions as a self-employed individual.
These IRS forms include:
- Form 1040
- Schedule D
- Form 8949
- Schedule C
- Schedule SE
How to Avoid Problems in the Future
If you’re asking these questions, you should take steps now to avoid the same problem in future years.
Here are some concrete steps you can take:
- Start Early – Many people don’t think about taxes until March or April, which can lead to a mad rush to the finish line. Instead of waiting until the last minute, start gathering tax documents, receipts, and other information as early as possible. And if you’re using an accountant, engage with one early on to avoid being last in line for their workload in April.
- Crypto Tax Software – Crypto tax software, like ZenLedger, can help you quickly and accurately calculate and prepare your taxes each year – even if you have complicated decentralized finance or non-fungible token transactions. ZenLedger also gives you a grand unified spreadsheet to see all your transaction details in one easy-to-read spreadsheet for you or your accountant.
- Estimated Taxes – Calculating and paying estimated taxes can help you spread out your tax obligations over several payments rather than running into a large lump sum that may be difficult to afford at the end of the year. By estimating taxes, you can also ensure that you’re relatively up to date in collecting and recording the data you’ll eventually need to file at the end of the year.
- Tax Professionals – If you don’t use a tax professional and struggle to complete taxes alone, it may be time to seek expert help. Tax professionals can help you accurately prepare taxes, calculate estimated tax payments, and meet tax deadlines. If you have significant crypto transactions, you may also want to consider using a crypto-friendly accounting firm or providing them with forms from tools like ZenLedger.
The Bottom Line
The October 16th deadline applies to taxpayers who requested an extension from the original April 15th deadline. Even if you can’t pay on time, filing on time is essential to avoid the costliest penalties. That said, if you have extenuating circumstances, you should contact the IRS early to ask if you can receive an additional extension without penalty.
If you need help filing taxes on time, ZenLedger can help streamline your crypto tax preparation. Our platform automatically aggregates transactions across wallets and exchanges, computes your capital gain or loss, and generates the necessary tax forms.
This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.