December was the ideal time to take stock of your financial situation and plan ahead for 2019. And for many of us, that means going through our paperwork and determining what our tax planning strategy should be. If you’re doing that now, good on you. You are likely to have a number of questions about tax implications of your cryptocurrencies or whether you have proper documentation if you donated cryptocurrency to a charity. While you likely have all the relevant forms available now, there’s no rush if you didn't complete your income tax filing by today's deadline—taking some extra time can ensure that you’re building the best possible optimization strategy.Here’s everything you need to know about how and why to file a tax extension.
What is a tax extension?
Simply put, a tax extension is a way to allow you more time to file your taxes. What it’s not, unfortunately, is a way to defer your Crypto Taxes and Accounting if you owe the IRS money. That’s because you’ll need to still pay “estimated taxes,” even if you are not completing your tax filing.When you file a Crypto tax extension, you will have an extra six months to complete your paperwork, putting your new date at October 15, 2019. If you don’t owe any taxes, you don’t need to file a tax extension—but you also won’t get your refund until you do.
How do I file a tax extension?
The great news is you don’t need to prepare some convoluted story to qualify for one. Virtually anyone can get a tax extension granted automatically, just by submitting your paperwork on or before Monday, April 15, 2019. And, it’s free!You’ll need to fill out IRS Form 4868—also known as the “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” It’s a simple form that requires you to estimate your tax liability, enter the amount on line 4 of the form, and file it by the deadline.E-filing is easy…and you can pay online with a bank transfer or a debit or credit card (although you will incur fees for using a credit card, not to mention the interest charges that can accrue if you don’t pay it off immediately).If you wish to submit a hard copy of the tax extension form, page 4 of the form has the address where you can send the form and your payment.
Why would I use a tax extension?
Since it doesn’t put off your IRS payments, you might be wondering what the benefits of a tax extension are at all. The main one is that it buys you more time to get your paperwork in order. Yes, you will still be paying a ballpark estimate of course, but with cryptocurrency, it can be a little more challenging to find your cost basis and other information you need to know to file your return by the standard tax filing deadline. Having more time to conduct research can be a smart strategy.
And if you’re seeking the advice of a tax professional, they might have more time to delve into your situation on May 14 than April 14. (However, do note that if you are due a refund, this also delays that payment.)If you don’t have the current funds to pay your tax bill, you should still file for an extension. That’s because the penalty for not filing is far worse than the amount assessed if you file without paying, which is 0.5% of your eventual payment. But not filing a return or extension request will garner you a penalty of 5%—you read that right, ten times as much!And if you’re considering not paying taxes on your cryptocurrency, don’t even think about it. The IRS is cracking down—in fact in March 2018, it issued an official reminder about reporting virtual currency transactions—and the penalties are significant. Taxpayers who fail to report their cryptocurrencies can be audited and assessed penalties and interest, and possibly even be subject to jail time and a larger fine.
What if I can’t pay?
If you owe more than you can afford, it can be tempting to put off filing at all, but remember the size of that penalty! Consider other ways of paying your taxes, such as selling some investments or taking out a bank loan. If you have exhausted all resources, you can file IRS Form 9465, known as an “Installment Agreement Request,” that authorizes the IRS to set up a monthly payment plan. The reason this shouldn’t be your first choice is because it will cost you: The IRS charges a fee to set up the account, ranging from $52 for a direct debit transaction to $105 for non-direct debits, plus an interest rate of about 8%. Since that is less than some credit cards, it might be a viable option, but finding another way to pay the bill is optimal.Filing a tax extension isn’t for everyone, but it’s nice to know your options, and a little extra time can be a boon in many cases.Need help with that ballpark figure on your cryptocurrency? Our free cryptocurrency taxes software can help you understand what you owe.