Need Additional Time to Nail Down Crypto Taxes? File an Extension!
Time is running out. The April 17th due date for 2017 U.S. personal returns is right around the corner, it can creep up before you know it. If you just finished off 2017 with a huge gain in your portfolio, you might be nervous about the infinite details of your crypto taxes. The good news is you could be eligible to extend your due date by 6 months (although the tax payment is still due by April 17th to avoid late payment penalties)!
2017 Tax Return Due Date
The standard Form 1040 (U.S. personal return) due date is April 17, 2018.
Eligible U.S. citizens can file Form 4868 by April 17th to request an automatic 6 months extension of the filing due date until October 15th (without a late filing penalty). Please note, this does not extend the time to pay the tax. Form 4868 is not an extension of time to pay, rather just an extension of time to file. So to avoid late payment penalties, it is typically recommended to make a payment.
How to Extend
Extensions can be filed online, through the payment system or by paper. Specific instructions are in the link below:
https://www.irs.gov/pub/irs-pdf/f4868.pdf
Is a payment required with the extension?
Yes, the federal income taxes due for 2017 generally should be paid with the extension. The extension will consider taxes due on all taxable income for the year (not just crypto gains), minus any income tax payments previously made to the IRS or withholding.
Do I need to file a separate extension for my home state and extending other tax forms?
You will still be responsible to consider how your home state taxes capital gains (for making an extension payment), and if any extension forms are separately required at the state level. Also, in some states, a form-plus-a-payment could be required for the extension to be accepted.
It is also recommended to consider if other unrelated tax filings (such as foreign bank account reporting ) are necessary, and if any extensions are separately required for such reporting.
What is the point of extending if I don't know how much tax I owe the IRS?
Virtually everyone who is extending their personal tax return has this dilemma (otherwise if they knew they wouldn't need to extend in the first place). The best course of action is to come up with a reasonable estimate of all significant realized crypto gains, combined with other tax return activity (wages, other investments, etc.) to come up with a rough all-in income tax estimate. Here are a few suggestions/considerations when creating a quick rough estimate of crypto taxes for extension purposes:
- Gains are realized and recognized on a U.S. personal return when an investor sells crypto, mines it, earns it or exchanges it for other crypto (unless like-kind exchange applies).
- Ignore favorable capital gain tax rates in calculating a tax payment, if you have been in crypto for less than a year and have realized gains. The favorable lower rates only apply to long-term capital gains.
- Consider how significant realized gains could bump you into a new tax bracket (instead of using your marginal bracket from last year's return) and could subject to additional surtaxes (i.e. net investment income tax).
- if you don't have time to go through every transaction, on approach might be to analyze wallet/exchange history for most significant gains of the year. Remember, still a bunch of small gains could add up to something big!
- Consider Steem earnings (but make sure to change the value of SBD as time goes by).
- For a heavy trader (thousands of transactions), one approach could be to assume the change in market value of the portfolio (minus USD cash infusions) is the total gain for extension purposes.
- Discuss any exchanges you made between cryptos with your tax advisor, to figure out whether you plan to take a "like kind" exchange position. My personal view is this is risky, but it's your personal judgement at the end of the day as I am not your personal advisor.
- Bitcoin/crypto forks and air drops are most likely taxable income to you based on the fair value on date of receipt.
- There are basic tax refund/payment calculators available online, which might be of some use in estimating the impact of crypto. For beginners, it might make sense to try to use the calculator to re-create your 2016 tax amount (within a margin of error) with your prior year figures, in order to make sure you are utilizing the tool correctly.
A few reasons to Extend
One reason to extend is not having enough time to secure the appropriate advisor to handle taxes.
Not having enough money to pay taxes is not necessarily a reason to extend, because the payment is due by April 17th. As mentioned above, form 4868 is not an extension of time to pay, rather just an extension of time to file.
In my personal view it is possible the IRS could issue more guidance on cryptocurrency taxation, such as treatment for (1) like-kind exchanges or (2) forked currencies, between now and the October 15th extended due date. Unfortunately this might come after the April 17t due date before extensions, or could come out right before the due date. If new IRS guidance comes out that contradicts a position taken on a previously filed return, an amendment of the return (and associated professional fees) could be necessary. Thus, there could be some benefit in waiting to file taxes (but the tax payment is still due in April) to avoid additional paperwork.
What if I file late or don't pay in enough
There are penalties and interest for late payments. There are also penalties for filing late (which the Federal extension protects from). Some general information is in the link below:
https://www.irs.gov/pub/irs-pdf/f4868.pdf
In some U.S. states, in some situations, late payment could make a return considered late (even if the state extension form is properly filed).
Takeaway
If you are busy before now an April, and have the tools to make a quick, solid estimate of crypto gains, filing an extension of time to file until October might be a viable option. As stated above, however, the income taxes are still due by April 17th, or else be subject to interest/penalties. Good luck!
Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post/book does not create a client relationship between the author and the reader.
Picture Credit
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This is a very comprehensive explanation of filing an income tax extension.
Thank you!
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It is my understanding that one can file extension without a payment in order to avoid a late filing penalty once actual return completed...as mentioned you will be charged additional interest and penalty on the final balance owed...which I believe runs about .75 percent each month...however...you avoid the much higher 5 percent per month late file penalty...
Please be advised this is my opinion only and is in regards to USA taxation...your state may be different...my state requires a payment of 90 percent of tax to be valid...years ago the Federal required something similar...this is not tax advice...you are responsible for your own research.
Perhaps, in the federal jurisdiction, the act of filing the extension form generally prevents one penalty and the extension payment prevents a different penalty. I sprinkled some clarifying language through the article.
Due to the associated late payment penalties, I was initially a little put off to go out and advertise that it was possible to not make a payment (instead I linked to the penalties section). As you noted, at the state level a person could be assessed a late filing if he/she fails to make a payment by the original due date (the payment is as important the form itself).
I fully appreciate your concerns...I have been in practice a number of years and find the "reality" of what is allowed is not always easily gleaned from the form instructions or IRS publications...the instructions clearly suggest a payment "should" be made...however...it is my understanding that the rules changed years back where an extension will be accepted to avoid a bigger late file penalty even if a payment isn't made....again...this is not tax advice...merely my understanding only and each taxpayer is responsible for doing their own research on their own or with a competent tax preparer....
The myriad of penalties is a mine field. Plus the international compliance penalties get nasty very quick some at $10,000 plus. Thanks for sharing, it keeps the discussion well rounded with diverse input!
I thought it was .5% a month for paying taxes late. As in half of 1 percent.
Great post btw @cryptotax
Correct for the penalty...but there is an interest computation as well I believe.