Do I have to pay estimated taxes on daytrading stock sales if I am employed as well?

[canoe]

Maybe read the instructions on the form 1040-ES you linked to?

"If, after March 31, 2020, you have a large
change in income, deductions, additional taxes, or credits
that requires you to start making estimated tax payments,
you should figure the amount of your estimated tax
payments by using the annualized income installment
method, explained in chapter 2 of Pub. 505. If you use the
annualized income installment method, file Form 2210,
including Schedule AI, with your 2020 tax return even if no
penalty is owed."

Also, if you go up a couple of posts I shared a way to get around that, basically you can make yourself a W-2 employee and do a big withholding in Dec. A little bit of a pain if you don't already run a business, but not something you couldn't accomplish with a day's work.

in chp 2 of pub 505? it defines expected AGI as total income minus expected adjustments.

but it then defines total income as "Total income includes all income and loss for 2019 that, if you had received it in 2018, would have been included on your 2018 tax return in the total on line 6 of Form 1040."

how are traders supposed to know in march, what their total income will be for that year? they keep alluding to using the previous year as a reference, in which case this just goes back to the 110% method mentioned earlier.

your workaround is neat i will admit.

 

[Sig]

in chp 2 of pub 505? it defines expected AGI as total income minus expected adjustments.

but it then defines total income as "Total income includes all income and loss for 2019 that, if you had received it in 2018, would have been included on your 2018 tax return in the total on line 6 of Form 1040."

how are traders supposed to know in march, what their total income will be for that year? they keep alluding to using the previous year as a reference, in which case this just goes back to the 110% method mentioned earlier.

your workaround is neat i will admit.

I would have to go back to look up the details, but basically there's a way you can account for all your money coming in during Q4. Maybe search for inheritances or something because I think that's what it is kind of designed for. Keep in mind that you would have to actually be in that situation. If you made $100K in Feb, lost $100K in July, and made $100K again in Dec you couldn't claim that you made all your money in the Q4 (although the W-2 workaround would make it a moot point).

 

[sprstpd]

how are traders supposed to calculate their expected taxes for each quarter? what's mentioned on the IRS website is of no help to traders imo. it just says:

"When figuring their estimated taxes each year, taxpayers need to account for life events that may affect their taxes. They should also adjust for recent changes in the tax law. They should make adjustments throughout the year if changes occur.

Individuals, sole proprietors, partners and S corporation shareholders generally use the worksheet in Form 1040-ES. They’ll need to know their expected adjusted gross income. They’ll also need to estimate their taxable income, taxes, deductions and credits. Some taxpayers find it helpful to use information from their prior year’s tax return when they complete the worksheet. Their estimates should be as accurate as possible to avoid penalties."

yeah...but how?

with trading, you could possibly make an entire year's worth of profits in a single volatile week.

what if you're profitable during q1 and q4, and not profitable during q2 and q3. why should traders have to pay money for q2 and q3 that they may not even have if they're at a significant loss for q2 and q3?

sure, if you don't want to worry about all this, you could go with the 110% spread out over 4 quarterly payments method. but what if you have a significant overall loss during that trading year? then you basically ended up giving out a 0% loan to the IRS for a year which is detrimental for those working in a profession that sorely depends on capital. that's a chunk of capital that traders could have put to good use.

this whole idea of applying an "expected" income determination from an activity where you can't possibly know your future income is laughable to say the least.

This is why they are called estimated taxes, because you won't know until the calendar year is over how much you will owe. If you pay too much, you'll get a refund but the IRS will get a little interest on that amount before they give it back. If you pay too little, you will pay penalties. In the grand scheme of things, percentage-wise it doesn't really matter a huge amount to your bottom line.

If you start out the year in the hole, then maybe you don't pay any estimated taxes for the first quarter. But what if you then kill it for the rest of the year? Well then you need to start paying quarterly estimated taxes at that point. Note that if your income is severely irregular, then the Annualized Income form for calculating estimated tax penalty is probably the way to go. It takes into account how much money you made during each quarter of the year when calculating penalties. Unfortunately, it is also a lot more complicated to fill out and you have to have good records of when all your income was made during the year.

The only time you won't pay penalties and won't get a refund is when you've paid safe harbor estimated taxes (100% or 110% of the previous year) and you've made more money than the previous year such that you owe more than what you paid in estimated. In that case the safe harbor kicks in and protects you from penalties.

 

[canoe]

This is why they are called estimated taxes, because you won't know until the calendar year is over how much you will owe. If you pay too much, you'll get a refund but the IRS will get a little interest on that amount before they give it back. If you pay too little, you will pay penalties. In the grand scheme of things, percentage-wise it doesn't really matter a huge amount to your bottom line.

If you start out the year in the hole, then maybe you don't pay any estimated taxes for the first quarter. But what if you then kill it for the rest of the year? Well then you need to start paying quarterly estimated taxes at that point. Note that if your income is severely irregular, then the Annualized Income form for calculating estimated tax penalty is probably the way to go. It takes into account how much money you made during each quarter of the year when calculating penalties. Unfortunately, it is also a lot more complicated to fill out and you have to have good records of when all your income was made during the year.

The only time you won't pay penalties and won't get a refund is when you've paid safe harbor estimated taxes (100% or 110% of the previous year) and you've made more money than the previous year such that you owe more than what you paid in estimated. In that case the safe harbor kicks in and protects you from penalties.

since trading is a job that relies on capital to generate revenue, capital to us is like inventory. overpaying estimated quarterly taxes can have a disastrous effect on our yearly performance.

shouldn't most traders go with Annualized Income installment method then to avoid a situation of sacrificing capital early on in the year (paying taxes) on "expected" future profits that may never come to fruition?

 

[Sig]

since trading is a job that relies on capital to generate revenue, capital to us is like inventory. overpaying estimated quarterly taxes can have a disastrous effect on our yearly performance.

shouldn't most traders go with Annualized Income installment method then to avoid a situation of sacrificing capital early on in the year (paying taxes) on "expected" future profits that may never come to fruition?

For sure I'd never pay estimated taxes beyond what I'd actually earned up to that point in the year.

 

[sprstpd]

since trading is a job that relies on capital to generate revenue, capital to us is like inventory. overpaying estimated quarterly taxes can have a disastrous effect on our yearly performance.

shouldn't most traders go with Annualized Income installment method then to avoid a situation of sacrificing capital early on in the year (paying taxes) on "expected" future profits that may never come to fruition?

Yes, the Annualized Income method is designed just for the type of irregular income stream that traders produce.