Filing for a tax extension is common for major investors of both crypto and traditional assets. By extending the filing deadline from April 15 to October 15 (April 18 and October 17 in 2022), the extension gives individuals and their tax professionals the time to completely and correctly reconcile complex data.
However, getting a crypto tax extension does not mean you receive extra time to pay your taxes. It only extends your clock for filing your tax returns. You still need to make an estimated payment of your taxes when you file for an extension.
Many taxpayers on extension are much more concerned about computing this estimate than they need to be. While of course you should do you best to reach an accurate estimate, the amount you pay is not as important as a) filing an extension and b) making any payment at all.
Although many don't realize it, most crypto investors should be making quarterly estimated tax payments on their investment income. This means that if you didn't pay enough estimated quarterly taxes during the tax year, you are already late paying your taxes; there are penalties for underpaying or not paying your estimated taxes quarterly. This tax will be assessed when you file your tax return.
Therefore, making the correct payment in April 2022 will not change the fact that you already owe penalties on your late tax payments. Rather, filing an extension will allow you to avoid a failure-to-file penalty (5% of balance per month) and dramatically reduce the size of the unmet balance on which any additional penalties or interest are based.
An extension removes the failure-to-file penalty, but not the failure-to-pay penalty. The failure-to-pay penalty is .5% per month for each month or part of a month the tax remains unpaid.
This means that you should try to estimate your full tax liability (regular income and crypto) by the tax filing deadline and make a payment to the IRS and your applicable state. Any additional balance due when you actually file the return will be subject to penalties from the day of the tax filing deadline (usually April 15) until your balance is paid.
It will also be subject to interest for the same time period. The IRS uses the federal short term rate based on daily compounded interest. The rates are set and published quarterly.
If your final tax liability is found to be less than the estimated payment you made, you will receive the balance back as a refund. Usually, you'll receive your refund within 21 days if you elect to receive it as a direct deposit and within 3 to 4 weeks if you choose to receive it as a check.
Please note that if your state has an income tax, you will also need to file an extension with your state's tax agency. If a balance is due, the state may require that balance to be paid with an extension.