Quarterly Crypto Taxes
How To Not Overpay the IRS & Avoid Bankruptcy
When you receive income in cryptocurrency or have capital gains from the sale of cryptocurrency it’s important to consider the tax consequences immediately to avoid overpaying in taxes. If you do not plan your quarterly estimated tax payments in advance when you generate income or gains, there is a high likelihood that you can significantly overpay in taxes.
We’ll go over best practices for estimating your taxes, capital management and how to pay your quarterly taxes. This will help you not only avoid interest in penalties with the IRS but also help to avoid overpaying due to volatility and other risks associated with cryptocurrency.
Quarterly Estimated Payment Schedule
Any time you receive cryptocurrency as a payment for goods or services you will have a tax liability associated with this transaction. When you sell a cryptocurrency for another cryptocurrency, fiat or to pay for a good or service this will also trigger a tax liability. To learn more about the taxability of specific cryptocurrency transactions, check out our Tax Guide here.
The IRS requires estimated tax payments on a quarterly basis. This means that as you generate income or capital gains throughout the year associated with your cryptocurrency transactions, you have to estimate and pay your taxes to the IRS on a quarterly basis to avoid interest and penalties. The quarterly payments are due April 15, June 15th, September 15th and January 15th. This means at the very least, you should estimate and pay your taxes quarterly to avoid overpaying the IRS in interest and penalties.
Penalties & Interest
If you fail to pay your taxes by the quarterly due dates you will be charged interest and penalties in addition to your tax liability. The Failure to Pay Penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. The penalty won’t exceed 25% of your unpaid taxes. In addition to penalties, interest rates are applied to all late tax payments. The IRS interest rates are set quarterly and are variable, which means they change every three months.
Estimates & Safe Harbor
In order to properly estimate your taxes, you can take on of two approaches depending on your facts and circumstances. In our experience, most of our clients will take the ladder approach but the former can work in specific circumstances.
The safe harbor estimated payment method requires taxpayers to pay 90% of the tax owed in the current year or 110% of the tax owed in the previous year. If you meet these criteria, then you will not owe interest in penalties. This a good option for taxpayers who have generated significantly more income or capital gains in the current year than previous year.
The other approach requires you to accurately calculate your taxes. In order to do this, your cryptocurrency and company accounting has to be up to date. Then you must calculate your projected tax liability based on your income and capital gains for the year. This is a process that we work with our clients on regularly. If you need help with crypto accounting and estimated tax payments, contact our team here.
It is important to consider you tax liabilities monthly or quarterly to avoid receiving BTC, ETH or another cryptocurrency at a high fair market value only to then have it drop significantly in price before you liquidate the crypto to pay your tax liability. I have seen companies and individuals lose their whole portfolio or very large percentages of it to this because they did not properly manage their crypto assets for tax payments.
If you receive crypto as a payment for a good or service, airdrop or generate capital gains you are taxed at the time of transaction based on the current fair market value of the asset you receive or sell. If you do not regularly estimate your taxes and move your tax liabilities into USD or stables then this can lead to you having to liquidate a large amounts of BTC, ETH or other assets at low fair market values to cover your tax liabilities when you pay your taxes for when you received the asset at a high valuation. Best practice is to liquidate at least your tax liability into USD or USDC to ensure you cover your taxes regardless of market conditions.
For example, let’s take a company that has generated $4 million in income that they received in ETH when ETH was $4,000 per coin from an NFT sale. The approximate tax liability would $1.6 million. If this company is properly planning for taxes, when they generate the $4 million in income, they will immediately trade at least $1.6 million from ETH to USD or a stable coin to avoid volatility risk. When it’s time to pay taxes, if ETH drops to $2,000 per coin this company would already have liquidated the $1.6 million to cover their taxes before the price drop. If this company neglected to do this, then they would have to liquate double the amount of ETH to over their taxes. That means they would liquidate 800 ETH rather than 400 ETH to cover the tax lability due to the IRS.
Capital management and projecting tax liabilities in advance of tax season is key to protecting your bottom line. No one wants to overpay Uncle Sam at the cost of your business or family’s finances. Businesses and individuals transacting in cryptocurrency must be especially diligent due to the volatility associated with cryptocurrency. If you set up a proper tax plan and run a successful business or investment portfolio, neglecting tax projections and capital management can cost you thousands or millions.
If you have cryptocurrency income or realized cryptocurrency capital gains Camuso CPA will help you project your tax liabilities, estimate your tax payments and properly manage your capital. At Camuso CPA, we have established a well-tested process to deliver clients with crypto assets and digital businesses accurate cryptocurrency accounting and timely tax projections.
About Camuso CPA
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At Camuso CPA, all our clients are digital asset investors and digital business owners. We’ve developed cryptocurrency specific expertise that allows us to provide tailored solutions to our clients in ways most other firm simply can’t.
Camuso CPA was one of the first CPA firms in the industry to provide their clients cryptocurrency accounting services and tax advisory. Camuso CPA was also the first CPA firms to accept cryptocurrency as a form of payment for professional services.
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- Read our Definitive Guide for Cryptocurrency Taxation to learn about cryptocurrency taxes from an experienced CPA.
- Read our Cryptocurrency Tax Planning Guide to learn about saving cryptocurrency taxes from an experienced CPA.