October 16th may seem like just another autumn day, but for some taxpayers, it’s a can’t-miss deadline. If you filed for a tax extension last year, it’s the final filing deadline for your federal income tax return. And since missing the deadline could lead to penalties and interest, you should start preparing now – if you haven’t already – to avoid any problems.
This article briefly recaps how crypto taxes work, what you need to know about the deadline, offers tips for last-minute filers, and how to avoid running into the same problem next year.
How Do Crypto Taxes Work?
Cryptocurrencies are treated as “property” by the IRS, meaning they’re subject to ordinary income and capital gains taxes. In other words, they’re more like stocks than typical currencies. If you trade or invest in cryptocurrencies, you typically owe tax on any increase in value when you sell or exchange them. And, if you earn rewards, you’ll usually be taxed on those too.
The most common source of confusion involves taxable events in cryptocurrencies. Unlike stocks, many people trade cryptocurrencies for other cryptocurrencies rather than converting them into U.S. dollars. The IRS typically considers these taxable events, meaning you will owe tax on these transactions even if you never received U.S. dollar proceeds.
For example, suppose you purchased some Bitcoin for $1,000 U.S. dollars and exchanged it for Ethereum worth $1,200 U.S. dollars. The price of Ethereum then falls and is only worth $900 by the end of the year. In this scenario, you would owe capital gains tax on the $200 profit even though you never sold it for U.S. dollars, and the Ethereum was ultimately worth less.
There are also a handful of ambiguous scenarios that make taxes challenging for crypto traders and investors. For instance, the IRS hasn’t issued clear guidance on whether using a cross-chain bridge (e.g., locking crypto on one blockchain to use on another) constitutes a taxable event. If you’re unsure of anything, consult a tax professional.
What is the October 16th Deadline?
Most taxpayers file and pay their taxes by April 15th, but if you need more time, you can file a six-month extension – postponing the deadline to October 15th (or the 16th if the 15th falls on a weekend as it does in 2023). By October 16th, you must file a complete and accurate tax return with the IRS, including all necessary forms and documentation.
The most common forms include:
- Form 1040 – The standard form for individual tax returns.
- Schedules – Additional income or deductions not on Form 1040.
- Form 1099 – Self-employment or other income (including crypto).
- W-2 – Wage and tax statement from your employer.
It’s important to note that tax extensions give you more time to file but not to pay. If you still haven’t paid your taxes, you should immediately make an estimated payment or contact the IRS to set up a payment plan since you incur penalties directly after the deadline. Generally, you must pay at least 90% of the taxes you owe or 100% of last year’s taxes to avoid penalties.
Penalties and Risks
Failure to meet the October 16th deadline will result in late-filing penalties. These penalties typically start at 5% of the unpaid taxes for each month or part of a month that your return is late, up to 25% of your unpaid taxes. If your return is over 60 days late, there’s also a minimum penalty for late filing that’s the lesser of $450 or 100% of the tax owed.
In addition, the IRS charges interest on penalties. The date interest starts accruing depends on the type of penalty, but the interest increases the amount you owe until you pay your balance in full. While interest charges weren’t significant in the past, rising interest rates have pushed these penalties sharply higher in recent years. See the current rates on the IRS website.
If you haven’t paid your taxes, you may also owe a Failure to Pay penalty equivalent to 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. But, if you file your tax return on time and have an approved payment plan, the penalty is reduced to 0.25% per month for the duration of the payment plan.
Finally, if you incur a Failure to File and Pay penalty, the failure to file penalty is reduced by the amount of the failure to pay penalty for that month (e.g., from 5% to 4.5%).
Tips for Last-Minute Filers
- Always file on time. The Failure to File penalty is sharply higher than the failure to pay penalty. So, you should always try to file your tax return on time, even if you cannot afford to make payments. Then, if you need time to make payments, you can establish a payment plan to reduce the penalty to just 0.25% per month.
- File electronically. E-filing is the fastest way to submit your tax return and reduces the chance for errors (e.g., unreadable handwriting or calculation mistakes) and eliminates the chances of your filing getting lost in the mail. In addition, many e-filing platforms allow for direct deposit, which can expedite any refund you’re due.
- Use crypto tax software. Crypto tax software can help streamline the tax preparation process by automatically connecting with your wallets and exchanges, computing your capital gain or loss, and generating the paperwork you need to file. ZenLedger also provides a detailed grand-unified accounting report for your tax professional or integrates with TurboTax for a set-and-forget solution for simpler returns.
- Don’t lie to save money. The IRS has invested heavily in crypto tax enforcement. While it’s possible to get away with under-reporting your crypto income, the blockchain provides a permanent record, and there’s no statute of limitations for fraud. As a result, the potential risk far outweighs any near-term tax savings.
- Remember your deductions. You can take several deductions when trading and investing in cryptocurrencies. For instance, you can typically deduct any trading fees and interest expenses if you’re borrowing capital to trade. In addition, you may be eligible for deducting certain business expenses if you’re trading as a business.
Planning Better Next Time
After you’ve finished scrambling to meet the October 16th deadline, it’s worth assessing what went wrong and how to avoid running into the same situation next year. Fortunately, there are several steps you can take to make tax season less stressful and more manageable – and now is the time to start with next year’s April 15th deadline looming.
The first step is creating a designated physical or digital folder to store all your tax documents, including your W-2s, 1099s, and receipts for deductible expenses. By filing these items as you receive them throughout the year, you don’t have to stress out about remembering and finding them over a few days or weeks at tax time.
Next, reserving some of your annual earnings and earmarking them for taxes is always a good idea. For example, if you trade or invest in crypto assets, you may want to set aside part of your profits from each transaction to cover the taxes at year-end. And, of course, if you’re required to make estimated payments, it’s essential to stay on top of those to avoid surprises.
And finally, consider using crypto tax software like ZenLedger to help organize your transactions and accurately compute what you owe. If you have a simple tax situation, ZenLedger might be all you need to file your taxes. But, even if you hire a tax professional, ZenLedger can help organize everything to reduce billable hours and ensure you’re paying the right amount.
The Bottom Line
Taxpayers who filed for an extension last year have until October 16th to file their federal tax returns. Using crypto tax software to automatically aggregate your transactions and compute your capital gains or losses, you can streamline the process. And once you’ve finished, consider preparing for next year’s return now to avoid future issues.
The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.