Day Trading and Estimated Taxes

[RhinoGG]

Quote from lindq:

If you've been reporting substantial income and not paying quarterly taxes and have not been assessed penalties, then you have simply been lucky...not right.

There is no confusion about this on the part of the IRS or knowledgable tax authorities. The regulations are very clear, and as I said I myself have paid penalities.

If you want to skip quarterly payments, go for it. But you put yourself clearly at risk of penalties and having to deal later with the IRS and your tax preparer.

As for me...having been through it once... it isn't worth that hassle, and the risk of opening up other issues in an audit.

Are you an attorney? My tax preparer is, he and his partner have a large and successful firm, recommends this, advises this, and has yet to have been "unlucky". He signs my returns each and every year, and assures me, if there is anything incorrect, he has much more to lose than I do. Heck, this is their business.

 

[sunggong]

Quote from RhinoGG:

Are you an attorney? My tax preparer is, he and his partner have a large and successful firm, recommends this, advises this, and has yet to have been "unlucky". He signs my returns each and every year, and assures me, if there is anything incorrect, he has much more to lose than I do. Heck, this is their business.

If you pay your tax + penalty when you write your one check, I don't think there is any problem.

IRS doesn't care as long as you pay. If paying the late payment penalty is a better option, there is nothing wrong with choosing that route.

 

[lindq]

Quote from RhinoGG:

He signs my returns each and every year, and assures me, if there is anything incorrect, he has much more to lose than I do. Heck, this is their business.

LOL! In what way does he have more to lose than you do???

In fact, if you are challenged by the IRS in an audit that results in billable hours, your tax attorney has much to gain. From you.

 

[sprstpd]

Quote from RhinoGG:

Are you an attorney? My tax preparer is, he and his partner have a large and successful firm, recommends this, advises this, and has yet to have been "unlucky". He signs my returns each and every year, and assures me, if there is anything incorrect, he has much more to lose than I do. Heck, this is their business.

You are either paying the interest already, or your preparer is full of crap and you owe more taxes. Either way, the sucker is probably you.

 

[TraderZones]

Quote from RhinoGG:

Are you an attorney? My tax preparer is, he and his partner have a large and successful firm, recommends this, advises this, and has yet to have been "unlucky". He signs my returns each and every year, and assures me, if there is anything incorrect, he has much more to lose than I do. Heck, this is their business.

This is a hard one. The choice is:

Listen to the IRS, which REQUIRES quarterly payments, and levies penalties and interest and possibly fines and jail time and can open up further audit potential

OR

Listen to RhinoGG (who-he?) who has a clever tax adviser (who-he?) who runs a successful business by advising his clients to ignore what the government requires...


That is a toughie, all right. My choice is, that this clever tax adviser took an H&R Block "become a tax adviser in only 1 week for $299" course.

 

[gaj]

for the OP: worry about making money, then taxes come later.

i somewhat underpay my quarterly early on. i've heard from some tax ppl that you should pay little on them , but i prefer to pay a chunk just so it's out of my mind. if i wasn't as confident in my trading, i'd pay a lot less than i do.

here's why - and i'll use fictitious numbers (with 1/3 money earned = taxes) to make a point:

let's say i make 12k the first quarter, and pay 4k as taxes.

then, i LOSE 6K in the second quarter. thus, i'm up 6k for the year. my total taxes for the first half of the year should be 2k.

i can't then call the government up and say "hey, i gave you 4k the first quarter of the year; give me back 2k+interest!"

it's a little bit fairer for an individual contractor, for example; even if their take-home pay fluctuates, they can never actually LOSE money unless they're the owner - in which case, they've likely set up the business to lose money, and they (as employee) gets a salary.

but for trading, or professional gambler, there's a chance you CAN lose that money. thus, underpaying is a much better option than paying full.

 

[Free Thinker]

Quote from gaj:

for the OP: worry about making money, then taxes come later.

i somewhat underpay my quarterly early on. i've heard from some tax ppl that you should pay little on them , but i prefer to pay a chunk just so it's out of my mind. if i wasn't as confident in my trading, i'd pay a lot less than i do.

here's why - and i'll use fictitious numbers (with 1/3 money earned = taxes) to make a point:

let's say i make 12k the first quarter, and pay 4k as taxes.

then, i LOSE 6K in the second quarter. thus, i'm up 6k for the year. my total taxes for the first half of the year should be 2k.

i can't then call the government up and say "hey, i gave you 4k the first quarter of the year; give me back 2k+interest!"

it's a little bit fairer for an individual contractor, for example; even if their take-home pay fluctuates, they can never actually LOSE money unless they're the owner - in which case, they've likely set up the business to lose money, and they (as employee) gets a salary.

but for trading, or professional gambler, there's a chance you CAN lose that money. thus, underpaying is a much better option than paying full.

exactly. remember as a trader our capital buys our inventory so in effect our capital is our inventory.
lets say you are a trader with a limited account and you have a huge first quarter. you send the irs a big chunk as estimated tax in the first quarter. as often happens after a big run you have a substanital drawdown. you run the risk of not having enough capital to continue trading. the ironic twist is that you may not even owe any taxes at the end of the year.

 

[Aisone]

Definitely don't pay estimated taxes in your first year, that's crazy. That said, I have otherwise always paid them so I know I'm always able to when its said and done (I don't care about any theoretical 'lost interest', only that I don't 'spend' my tax money)

If you're self-employed and doing this basically fulltime, you can wash your buys and sells to get a net gain. To do so, you're technically supposed to claim a mark-to-market election in advance (and only need to do it once as a trader.) Read Irs pub 550 page 72 under 'mark to market election' on that one.

In fact read the whole section in pub 550 'Special Rules for Traders in Securities.' It also discusses that traders don't have to pay self employment taxes as well, and a few other things.

I've found that most accountants outside specializing in the industry really don't have a clue how to properly do a return for a trader.

 

[shortie]

Quote from RhinoGG:

Nah, stop with the quarterly payments.
I used to do that too, until I met, and hired a real tax pro. He's a "Tax Attorney", and the first thing he said when I met with him is to stop the quarterly payments at once. I said what about penalties, etc..., he said not to worry, he knows the rules, better then most in the IRS, so stop that shit at once. And, if taxes are due at the end of the years (always are), then I just write one (big!) check. Its so much easier this way, and much less stressful. If you are at all serious about this, you'll research and find a good tax accountant/attorney who knows what he's doing.

you could be right if most of the income comes at the end of the year (or maybe if it could be argued to IRS that with trading the income always comes at the end of the year because of the risk of loss).

"Annualized Income
Installment Method
There's one special case where it's to your advantage to fill out Form 2210. If most of your income came late in the year, you may be able to reduce or even eliminate your penalty by making a special calculation. This calculation is even more complicated than the regular penalty calculation, but it sometimes reduces the penalty by a substantial amount.
The idea is that you don't have to pay estimates in April, June or September for income you receive in December. If your income is bunched at the end of the year, the calculation will show that you're allowed to make smaller payments for the earlier quarters while making a larger one later in the year. Even if you didn't make a larger payment in September or January, this calculation can reduce the size of the underpayment for the earlier quarters, and that means a smaller penalty."

http://www.fairmark.com/estimate/penalty.htm

 

[joeactuary]

Wait a sec. If he just started trading, I doubt he registered himself as a Trader. And I don't think he's required to call himself a trader when he does file his taxes, so any investment income would not be considered "Earned Income" As such, there shouldn't be anything quarterly to pay, no social security, medicare taxes etc... He jsut has to pays taxes like every other schmo by April 15. (on the downside, with no earned income he won't be able to take business deductions or contribute to a Roth IRA)

Not a tax attorney so blast away...