How often does day trader (in US) pay taxes?
- Thread starter toad57
- Start date
Thanks for the info. on the Safe Harbor rules. The MSN article indicates I'd need to pay 110% of past years earnings to not worry about further payments. I'm not even sure that's why the IRS hounds me each year. Hear's my situation:
It seems like they (IRS) are out to get me. Each of the past three years, I've paid 100%+ of taxes due by mid-Jan. (Each year greater than the past year). My CPA is always sure there will be no problems. Each year I get a 1-2k refund in June, and each year I get an assessment for underpayment with a fine and interest due (no additional taxes). I make most of my income in the 4th quarter, so that's naturally a much bigger check to Uncle Sam for estimated taxes (and the first time I know what my income for the year will be). My CPA doesn't understand what's up, so I figure I'll just send in more money early in the year and give them 110% of taxes due so they'll just leave me alone! I can't write off anything, so my taxes are uncomplicated. I just can't stand reading "you have 30 days from the date of this letter to pay in full", because if that letter got misplaced, I'd have a lien on my house before I blinked. Do you have any idea what I've been doing wrong? The IRS ombudsman has been of no help, so for the peace of mind, I just decided to send in more than I could possibly owe. Maybe the IRS will go chase someone else with a Caymen Is. account, now.
It seems like they (IRS) are out to get me. Each of the past three years, I've paid 100%+ of taxes due by mid-Jan. (Each year greater than the past year). My CPA is always sure there will be no problems. Each year I get a 1-2k refund in June, and each year I get an assessment for underpayment with a fine and interest due (no additional taxes). I make most of my income in the 4th quarter, so that's naturally a much bigger check to Uncle Sam for estimated taxes (and the first time I know what my income for the year will be). My CPA doesn't understand what's up, so I figure I'll just send in more money early in the year and give them 110% of taxes due so they'll just leave me alone! I can't write off anything, so my taxes are uncomplicated. I just can't stand reading "you have 30 days from the date of this letter to pay in full", because if that letter got misplaced, I'd have a lien on my house before I blinked. Do you have any idea what I've been doing wrong? The IRS ombudsman has been of no help, so for the peace of mind, I just decided to send in more than I could possibly owe. Maybe the IRS will go chase someone else with a Caymen Is. account, now.
Sorry, sometimes I tend to run thoughts together.
The first is if you don't have taxes taken out on a W-2 you will ALWAYS have to pay ES in both state and federal form unless your income is under whatever the level is 1000?
Now the second interrelated is issue is how to PAY ES without being penalized but without PAYING TOO MUCH IN TAXES.
The first scenario is that will make MORE money this year than you did last year.
IF last year you made 100K and Paid 15K in taxes. Then for this years ES you would have to pay $3750 each quarter April 15, June 15, Sept 15 and Jan 15. In that case you would be FREE of any UNDERPAYMENT penalty under the Safe Harbor rules. So lets say this year you made 200K and owed 30K in taxes. When you file your return you would send an additional check for 15K for the total of 30K. If you waited until April 2003 to pay the full 30k there would be penlites.
Now the second scenario SO YOU don't OVER PAY. Is if last year you made more and are POSITIVE that you will earn LESS this year. So last year you earned 100 and paid 15k in taxes. But 50K of this was from trading and 50K was from a one time gain on the sale of a rare coin. This year you are CERTAIN that you are only going to earn (50K) then I would pay ES on $7500 in tax on the basis that the other 50K was a one time deal. AS LONG AS YOU HAVE PAID 100% OF YOUR TAX LIABILITY BY APRIL 15 IN 4 PAYMENTS THERE IS NO penalty. The point is you don't have to send 15k this year to avoid the penalty.
To recap this. You would use the safe harbor rules to avoid penalty if you plan to make more this year than last. Or if this is your first year making ES, you could use last years tax as a guideline to calculate ES.
I hope this makes the matter a little more clear. Anyone can feel free to email me if they have a situational question that they don't want to post. Or post a hypothetical question and I will TRY to answer it.
The first is if you don't have taxes taken out on a W-2 you will ALWAYS have to pay ES in both state and federal form unless your income is under whatever the level is 1000?
Now the second interrelated is issue is how to PAY ES without being penalized but without PAYING TOO MUCH IN TAXES.
The first scenario is that will make MORE money this year than you did last year.
IF last year you made 100K and Paid 15K in taxes. Then for this years ES you would have to pay $3750 each quarter April 15, June 15, Sept 15 and Jan 15. In that case you would be FREE of any UNDERPAYMENT penalty under the Safe Harbor rules. So lets say this year you made 200K and owed 30K in taxes. When you file your return you would send an additional check for 15K for the total of 30K. If you waited until April 2003 to pay the full 30k there would be penlites.
Now the second scenario SO YOU don't OVER PAY. Is if last year you made more and are POSITIVE that you will earn LESS this year. So last year you earned 100 and paid 15k in taxes. But 50K of this was from trading and 50K was from a one time gain on the sale of a rare coin. This year you are CERTAIN that you are only going to earn (50K) then I would pay ES on $7500 in tax on the basis that the other 50K was a one time deal. AS LONG AS YOU HAVE PAID 100% OF YOUR TAX LIABILITY BY APRIL 15 IN 4 PAYMENTS THERE IS NO penalty. The point is you don't have to send 15k this year to avoid the penalty.
To recap this. You would use the safe harbor rules to avoid penalty if you plan to make more this year than last. Or if this is your first year making ES, you could use last years tax as a guideline to calculate ES.
I hope this makes the matter a little more clear. Anyone can feel free to email me if they have a situational question that they don't want to post. Or post a hypothetical question and I will TRY to answer it.
Here is the second part and I hope this will clear it up. I have a kids group to go to, but when I get home I will see if I can post a more specific example.
annualization.
Acrary, this SHOULD take care of your problem, but then again I have gotten the same thing from my state each year.
Let's say you make 10,000 in each of the first three quarters and make 70,000 in the last quarter. Keeping with the prior example of a 15% effective tax rate. You would be justified in paying $1500 in ES in each of the first 3 quarters and $10,500 in the last quarter. Now the rub is that MOST software, and I am guessing the IRS software will calculate this situation as owing a penalty UNLESS you use the annualization method. What this does is effectively smoothes your income/payment as if it were earned evenly throughout the year. You will frequently find examples for professions like farming, retailers, ice cream vendors.
In that situation, I would purchase a Turbo Tax or Kiplingers and run the numbers myself. I use Kiplinger and use the annualization function to wipe out my penalty.
From there, and I wrote a letter last year to NC for this very reason, I would enclose a copy of the tax return with the calculation, a letter explaining your situation and shoot it off.
Again, feel free to take this off line and I will see what I can come up with.
annualization.
Acrary, this SHOULD take care of your problem, but then again I have gotten the same thing from my state each year.
Let's say you make 10,000 in each of the first three quarters and make 70,000 in the last quarter. Keeping with the prior example of a 15% effective tax rate. You would be justified in paying $1500 in ES in each of the first 3 quarters and $10,500 in the last quarter. Now the rub is that MOST software, and I am guessing the IRS software will calculate this situation as owing a penalty UNLESS you use the annualization method. What this does is effectively smoothes your income/payment as if it were earned evenly throughout the year. You will frequently find examples for professions like farming, retailers, ice cream vendors.
In that situation, I would purchase a Turbo Tax or Kiplingers and run the numbers myself. I use Kiplinger and use the annualization function to wipe out my penalty.
From there, and I wrote a letter last year to NC for this very reason, I would enclose a copy of the tax return with the calculation, a letter explaining your situation and shoot it off.
Again, feel free to take this off line and I will see what I can come up with.
Tradrmac,
When it comes to taxes .... I am dumb, dumb, dumb.
How about this scenario?
You have elected Mark to Market and during the first quarter you:
Make $1500 on MSFT
Make $ 800 on MSFT
Make $ 700 on MSFT
$3000 Total x 15 percent = $450
You lose $150 on MSFT
You lose $ 200 on INTC
You lose $125 on BRCM
You lose $ 110 on BRCD
You lose $600 on INVN
$1100 Total
$3000-$1100 = $1900 Net gain
$1900 x 15 percent= $285
Which do you pay the IRS?... the $450 or the $285...my dumb guess would be the $285. Also if you did elect Mark to Market , then you are no longer subject to the wash sale rules. If your losses exceed your gains, do you get to deduct all your losses....there is no limit?
Lastly, if you are suffering a net loss this quarter, does that mean you still must pay the IRS money because you made money last year?
When it comes to taxes .... I am dumb, dumb, dumb.
How about this scenario?
You have elected Mark to Market and during the first quarter you:
Make $1500 on MSFT
Make $ 800 on MSFT
Make $ 700 on MSFT
$3000 Total x 15 percent = $450
You lose $150 on MSFT
You lose $ 200 on INTC
You lose $125 on BRCM
You lose $ 110 on BRCD
You lose $600 on INVN
$1100 Total
$3000-$1100 = $1900 Net gain
$1900 x 15 percent= $285
Which do you pay the IRS?... the $450 or the $285...my dumb guess would be the $285. Also if you did elect Mark to Market , then you are no longer subject to the wash sale rules. If your losses exceed your gains, do you get to deduct all your losses....there is no limit?
Lastly, if you are suffering a net loss this quarter, does that mean you still must pay the IRS money because you made money last year?
yep mark to market allows you to have only the net profit taxable (after the loss deducted).
no gain, no tax.
the only thing is you can't do that for too long, if you lose for years your activity won't be a business but a hobby. that's bad, 'cause no biz means no mark to market anymore. so although in theory there is no limit on loss deduction, you can't do that forever before risking complete reevaluation of your status.
(PS you may also deduct your trading business expenses from your profit too : data feed, exchange fees, internet connection, magazines, computers (depreciation) etc.)
no gain, no tax.
the only thing is you can't do that for too long, if you lose for years your activity won't be a business but a hobby. that's bad, 'cause no biz means no mark to market anymore. so although in theory there is no limit on loss deduction, you can't do that forever before risking complete reevaluation of your status.
(PS you may also deduct your trading business expenses from your profit too : data feed, exchange fees, internet connection, magazines, computers (depreciation) etc.)
TNTNEO,
Thanks for your reply
....here is a couple of more questions for you guys.
1. If you made money last year you are required to make estimated taxes per quarter the following year based upon what you made last year. Right?..........soooooooo......what if this year during the first quarter you were not profitable....you still have to pay the estimated tax I think....you're just simply out of luck....if you made a $100,000.00 last year then they (IRS) are going to require you to pay the estimated tax, regardless if you are profitable or not, or else suffer penalties and fines. Right?
2. Now that you have made the Mark to Market election, your trades no longer go on Schedule D....the trades get reported on Form 4797. Right?
Thanks for your reply
....here is a couple of more questions for you guys.1. If you made money last year you are required to make estimated taxes per quarter the following year based upon what you made last year. Right?..........soooooooo......what if this year during the first quarter you were not profitable....you still have to pay the estimated tax I think....you're just simply out of luck....if you made a $100,000.00 last year then they (IRS) are going to require you to pay the estimated tax, regardless if you are profitable or not, or else suffer penalties and fines. Right?
2. Now that you have made the Mark to Market election, your trades no longer go on Schedule D....the trades get reported on Form 4797. Right?
There are several interrelated issues here so I will try to address them in order to tie them together.
Let's assume you elected MTM for 2001. You are correct that you would use 4797 to report your gains and losses from trading. You would also use 4797 to report any securities that you are still holding for trade as of December 31. Any securities that you are holding as investments should really be in a separate account, for these you would use Scd D.
TNT was right also you need to keep track of all of your legitimate business expenses. This would be almost anything used in the production of income. PUBLICATION 587 gives you the breakdown for home office deductions so read that. Expenses get dropped in Schedule C.
Now let's assume that you made 100K at the end of the year. And your tax was 15K, then your effective rate is 15%. Don't get hung up on this on a Trade to Trade Basis, but you may need it for planning. To figure this for yourself you would divide line 58 by line 34 on your 1040.
During this year, you can forget about day to day fluctuations of trades by dividing your 2001 tax by 4 and send the IRS a check each quarter. My position, and some may view it differently is that if your income drops that you at least send the IRS something each quarter. I play the float with the phone company but not uncle sam. This is where the effective rate would come in. If in the middle of the year your income drops by 50% you could just say ok this quarter I made 12500 so I will send $1875. Which is 15% * 12500. Again use YOUR effective rate not 15%. This is not perfect but if your income drops it will get you close and should not result in any penlites. The goal would be to have 100% of your tax paid by April 15.
For your example where you made money one quarter paid the ES and then the next quarter your income drops, I personally would send the same as the 1st quarter ES to keep things consistent. Inconsistencies are audit triggers, so if your trading style does involve frequent income swings from gain to loss just drop each quarters ES a little. This assumes that you plan as a matter of the market on earning less this year in total than last.
I will touch on the loss question next as I get wordy.
Let's assume you elected MTM for 2001. You are correct that you would use 4797 to report your gains and losses from trading. You would also use 4797 to report any securities that you are still holding for trade as of December 31. Any securities that you are holding as investments should really be in a separate account, for these you would use Scd D.
TNT was right also you need to keep track of all of your legitimate business expenses. This would be almost anything used in the production of income. PUBLICATION 587 gives you the breakdown for home office deductions so read that. Expenses get dropped in Schedule C.
Now let's assume that you made 100K at the end of the year. And your tax was 15K, then your effective rate is 15%. Don't get hung up on this on a Trade to Trade Basis, but you may need it for planning. To figure this for yourself you would divide line 58 by line 34 on your 1040.
During this year, you can forget about day to day fluctuations of trades by dividing your 2001 tax by 4 and send the IRS a check each quarter. My position, and some may view it differently is that if your income drops that you at least send the IRS something each quarter. I play the float with the phone company but not uncle sam. This is where the effective rate would come in. If in the middle of the year your income drops by 50% you could just say ok this quarter I made 12500 so I will send $1875. Which is 15% * 12500. Again use YOUR effective rate not 15%. This is not perfect but if your income drops it will get you close and should not result in any penlites. The goal would be to have 100% of your tax paid by April 15.
For your example where you made money one quarter paid the ES and then the next quarter your income drops, I personally would send the same as the 1st quarter ES to keep things consistent. Inconsistencies are audit triggers, so if your trading style does involve frequent income swings from gain to loss just drop each quarters ES a little. This assumes that you plan as a matter of the market on earning less this year in total than last.
I will touch on the loss question next as I get wordy.
Ok, the IRS will let you lose as much money as you want, the question is HOW the losses are handled. The Hobby Loss rules would apply in a situation where your "business" does not show a profit in the last 3 of five years. You need to have a profit motive and continuously and substantially participate in any business to have your losses truly be business losses.
In electing MTM I will assume that you meet the Profit Motive test and all of your business related expenses are deductible. This would mean that you could bring your income to 0, but as TNT said you can't do this forever. The more likely reason for the loss would be trading losses, which I doubt you would create just to save taxes. This is where MTM is an advantage over regular treatment. These losses can be carried forward and or back and applied against other years taxes.
Be careful in your first year because a CHANGE in ACCOUNTING METHOD which is what MTM is that results in a loss generally must be carried forward.
If this year you earn 100K but next year you lose 25K, you can CARRYBACK the LOSS to offset the prior years income and taxes. Or you can carry the loss forward to offset future taxes. Again this is not limited to the 3K that an ordinary investor would face.
If this leaves open questions or creates more feel free. The research was always the part of tax work I enjoyed, it was sitting down and doing the returns that I really hated.
Well, COPS is on and I can't sleep so it is off to the couch.
In electing MTM I will assume that you meet the Profit Motive test and all of your business related expenses are deductible. This would mean that you could bring your income to 0, but as TNT said you can't do this forever. The more likely reason for the loss would be trading losses, which I doubt you would create just to save taxes. This is where MTM is an advantage over regular treatment. These losses can be carried forward and or back and applied against other years taxes.
Be careful in your first year because a CHANGE in ACCOUNTING METHOD which is what MTM is that results in a loss generally must be carried forward.
If this year you earn 100K but next year you lose 25K, you can CARRYBACK the LOSS to offset the prior years income and taxes. Or you can carry the loss forward to offset future taxes. Again this is not limited to the 3K that an ordinary investor would face.
If this leaves open questions or creates more feel free. The research was always the part of tax work I enjoyed, it was sitting down and doing the returns that I really hated.
Well, COPS is on and I can't sleep so it is off to the couch.