Do 1256 gains require quarterly tax payments, assuming no other income

[trademonist]

I wasn't sure if this belongs in here or the tax section since it's specifically intend to answer the question of whether index futures gains (1256 gains) require quarterly tax payments, assuming the person has no other income (no cap gains of any kind from non-index futures trading, no work income, no 1099's, etc), and they have made no trader status election changes, owe no tax from the previous year, etc. Just a base case with gains.

I know all of my futures trades are always reported as a single P/L at year-end, but no article I've found makes it clear that if you open/close an index futures trade in a given quarter, and that trade nets enough income to push you over the threshold of 1K tax due for the year, that you must make a quarterly estimated tax payment. It seems like they suggest (but never clearly state) that all 1256 gains are only taxable at year-end, even if you had a big gain in Q1 and zero for the rest of the year. Does the IRS treat it like all of those gains only occurred in Q4/year-end for tax purposes?

For the past few years I was always working a full time job so I just had my employer deduct a bunch of tax from my paycheck to push me past the requirements for having to make estimated tax payments (I always payed more than 90% of the previous year's tax). But this year I left work in January to take time off and I still trade, and thankfully I have taxable gains, so it's a new problem I need to solve.

Any ideas?

Thanks.

 

[Overnight]

...It seems like they suggest (but never clearly state) that all 1256 gains are only taxable at year-end, even if you had a big gain in Q1 and zero for the rest of the year. Does the IRS treat it like all of those gains only occurred in Q4/year-end for tax purposes?...

Long answer...

Hell, not even the IRS really knows how to handle section 1256 contracts. The problem is this...

You make 15K in Q1. Mark-to-market gain of $15K for the year. So you send off an estimated tax payment in Q1 for $15K. In Q2 you lose 10K, so you make no payment. You have marked-to-market for a gain of $5k. Now, in Q3, you really could have used that money you made in Q1 to help make money in Q3. Is it really fair that you are supposed to estimate your end-of-year tax each quarter when you don't know what your end-of-year income will be?

Anyways, so you lose 10K in Q3, MTM of -$5K, but make 20K in Q4. Your year-end M2M gain is 15K. So really, when did you make that $15K for the year? Was it in Q1 or Q4? IIRC, the 1256 instructions say to post your EOY MTM gains, which seems it would negate the need for estimated tax payments throughout that year.

The two thoughts on this are...

A) It wouldn't hurt to send in the payments, because you will get back the overpayments as a refund.

B) The IRS cannot possibly expect one to know how a 1256 trader is going to know his EOY gains or loss THROUGH the year, so F-them.

-----------------

The short answer...

Speak with an accountant who has dealt with that form before. You'll see greentradertax.com mentioned around here eventually.

 

[ballsofgold]

I always just closed the books at the end of the year and never got audited.

The only time i got audited is when tax document from broker reported x and i accidentally reported y.

 

[Girija]

I wasn't sure if this belongs in here or the tax section since it's specifically intend to answer the question of whether index futures gains (1256 gains) require quarterly tax payments, assuming the person has no other income (no cap gains of any kind from non-index futures trading, no work income, no 1099's, etc), and they have made no trader status election changes, owe no tax from the previous year, etc. Just a base case with gains.

I know all of my futures trades are always reported as a single P/L at year-end, but no article I've found makes it clear that if you open/close an index futures trade in a given quarter, and that trade nets enough income to push you over the threshold of 1K tax due for the year, that you must make a quarterly estimated tax payment. It seems like they suggest (but never clearly state) that all 1256 gains are only taxable at year-end, even if you had a big gain in Q1 and zero for the rest of the year. Does the IRS treat it like all of those gains only occurred in Q4/year-end for tax purposes?

For the past few years I was always working a full time job so I just had my employer deduct a bunch of tax from my paycheck to push me past the requirements for having to make estimated tax payments (I always payed more than 90% of the previous year's tax). But this year I left work in January to take time off and I still trade, and thankfully I have taxable gains, so it's a new problem I need to solve.

Any ideas?

Thanks.

A day trader's earnings are not classified as earned income so there is no need for estimated taxes. As the other posts said, check with a CPA.

 

[sprstpd]

I wasn't sure if this belongs in here or the tax section since it's specifically intend to answer the question of whether index futures gains (1256 gains) require quarterly tax payments, assuming the person has no other income (no cap gains of any kind from non-index futures trading, no work income, no 1099's, etc), and they have made no trader status election changes, owe no tax from the previous year, etc. Just a base case with gains.

I know all of my futures trades are always reported as a single P/L at year-end, but no article I've found makes it clear that if you open/close an index futures trade in a given quarter, and that trade nets enough income to push you over the threshold of 1K tax due for the year, that you must make a quarterly estimated tax payment. It seems like they suggest (but never clearly state) that all 1256 gains are only taxable at year-end, even if you had a big gain in Q1 and zero for the rest of the year. Does the IRS treat it like all of those gains only occurred in Q4/year-end for tax purposes?

For the past few years I was always working a full time job so I just had my employer deduct a bunch of tax from my paycheck to push me past the requirements for having to make estimated tax payments (I always payed more than 90% of the previous year's tax). But this year I left work in January to take time off and I still trade, and thankfully I have taxable gains, so it's a new problem I need to solve.

Any ideas?

Thanks.

Just look at the forms. If you pay no estimated tax through the year and you are profitable, you will end up paying underpayment of estimated tax penalties. So yes, you have to pay estimated tax on any income you might receive throughout the year. As other people have pointed out, actually estimating what you are going to make in the future as a trader is almost impossible. Good luck!

 

[Scataphagos]

B) The IRS cannot possibly expect one to know how a 1256 trader is going to know his EOY gains or loss THROUGH the year, so F-them.

Not exactly... been through this myself several times.

Background.... When I ran my mutual fund timing business, I always seemed to have my best results in the 4th quarter. However, the IRS "presumes" your total gains for the year were earned "evenly" throughout the year and quarterly estimated tax payments were supposed to be made accordingly.

If you have a big 4th quarter, you might get an inquiry from the IRS as to "exactly" when your gains were made so as to justify not having paid them sooner so that you can avoid a "late payment" penalty.... sort of like you might have to pay penalties for not paying quarterly estimates on ANTICIPATED gains.

As a general rule... I'd suggest making quarterly payments a bit "generously". If you overpay, you'll get a refund. Really not worth the hassle to try to "fine-tune" quarterly payments if you were to come up short on your estimates.

(In case you don't know... the IRS has "penalties for being late" + "interest on late payments" + PENALTY INTEREST (even higher rates if they deem appropriate)... for most of us, better to avoid all that business if possible. And when it comes to taxes... the government would sooner let a muderer go free than make concessions on the tax due on a bottle of hootch.)

 

[ballsofgold]

Not exactly... been through this myself several times.

Background.... When I ran my mutual fund timing business, I always seemed to have my best results in the 4th quarter. However, the IRS "presumes" your total gains for the year were earned "evenly" throughout the year and quarterly estimated tax payments were supposed to be made accordingly.

If you have a big 4th quarter, you might get an inquiry from the IRS as to "exactly" when your gains were made so as to justify not having paid them sooner so that you can avoid a "late payment" penalty.... sort of like you might have to pay penalties for not paying quarterly estimates on ANTICIPATED gains.

As a general rule... I'd suggest making quarterly payments a bit "generously". If you overpay, you'll get a refund. Really not worth the hassle to try to "fine-tune" quarterly payments if you were to come up short on your estimates.

(In case you don't know... the IRS has "penalties for being late" + "interest on late payments" + PENALTY INTEREST (even higher rates if they deem appropriate)... for most of us, better to avoid all that business if possible. And when it comes to taxes... the government would sooner let a muderer go free than make concessions on the tax due on a bottle of hootch.)

mutual fund business is not 1256 contracts.

under 1256 contracts you are eligible for mtm accounting election at which you only report at EoY

 

[ballsofgold]

moreover, if you have a loss under the mtm election ( sec, 475) on open positions, then you can roll your loss forward into the next year,

yall mofo's need to hire an accountant

 

[Scataphagos]

under 1256 contracts you are eligible for mtm accounting election at which you only report at EoY

I didn't know there is a special exemption for 1256. (You sure about what you said?)

As a general rule, the IRS wants tax estimates to be made as the gains are made... your posit is contrary to that.

 

[ballsofgold]

I didn't know there is a special exemption for 1256. (You sure about what you said?)

As a general rule, the IRS wants tax estimates to be made as the gains are made... your posit is contrary to that.

politely, he asked about 1256 contracts in the title

i am 100% sure. If you don't want to report quartely, then you need to declare to the IRS that you want mtm election 475.

you have to pass a certain test, then if so, you don't need to report quarterly