It’s tax season for everybody. But for traders, tax season is potentially year-round. There are some specific and important IRS rules regarding taxes on trading profits. We’re not tax accountants, but we want you to make smart choices about your taxes just like you make smart choices about your trades. This article will help you ask your accountant the right questions to make the process easier.
Does the IRS require estimated tax payments throughout the year on capital gains or can you wait until the end of the year?
Traders all try to make money, and if you are following the tastytrade way, hopefully, you are chalking up more winners than losers with high probability trades! If your profits are bigger than your losses, you may have to pay taxes quarterly on those profits.
If you are trading in a taxable account and accumulating profits, you are subject to estimated income tax payments and the associated rules on all of your income. That includes any capital gains from trading. Now, a lot of you trade but are also receiving wages from your employer.
They withhold taxes from your paycheck on that income. There is no one withholding taxes on your trading income, so you may need to pay quarterly estimated tax payments. So, here are a few things that might be helpful to bring up to your tax accountant.
Due dates for individuals are:
- April 15 - (1st quarter for the current year)
- June 15 - (2nd quarter for the current year)
- September 15 - (3rd quarter for the current year)
- January 15 - (4th quarter for the prior year)
If the 15th falls on a weekend, it is due the next business day.
There are two ways to calculate your quarterly estimated tax payments (but don’t forget to include the tax you’ve already paid through your withholdings on any wages you’ve earned). You can take the lower of the two:
- 90% of the tax shown on the current year’s return, or
- 100% of the tax shown on the prior year’s tax return, also referred to as the “Safe Harbor Rule” (Note: If you are in the higher income tax brackets, it’s 110%). The nice thing about the Safe Harbor is that if you are making significantly more in the current year, you can pay last year’s tax or 110% of it, and defer the rest until April 15 when your tax return (or extension) is due, without penalty or interest.
One last note of caution, traders sometimes want to reserve paying any tax until they know how they end up for the whole year. Be careful not to fall into that trap because the penalties and interest may not be worth it in the end. It’s all part of the calculation. See IRS Publication 505 and Form 2210 for more details.
And remember, if you have to pay quarterly estimated taxes because of your trading income, that’s a high-class problem, and it means you’re putting winning trades on the board. If you haven't seen our other posts on trader taxes, go here and here.
Good luck trading!!