Guys, If I have cap gains of say 100k for 2008 do I need to pay estimated taxes on that at end of calendar year or can I wait until I file my personal taxes in April? This is in 1256 contracts not that I imagine that makes a difference. Thanks!
To avoid a penalty, you must make quarterly estimated tax payments. The safe harbor provision is 100% of your 2007 tax paid in 4 equal installments. If you miss or underpay any of your installments, there is probably no reason to continue making estimated payments. Some people automatically pay the penalty each year, figuring it is a cost of capital.
what happens if OP had no income in 2007, hence, should not have paid quarterly installments under safe harbor. but he still owns capital gains on 100K made in 2008. when should he pay the tax: at year end or on Apr-15-2009?
If the OP has no tax liability in 2007, he should be able to claim safe harbor and pay no penalty. There is no benefit to paying before 4/15/09. Keep in mind that I am a trader, not an accountant.
rwk, so if I understand you correctly, even if I have a fulltime job, I need to pay estimated taxes based on my capital gains per quarter? What if the account fluctuates and you made money one quarter but lost the next quarter? Wouldn't I just be making things worse by paying out the money at the worst possible time(right before a drawdown)?
In the U.S., we have a pay-as-you-go tax system. That is why we have withholding for employment income and estimated taxes for all else. But paying estimated taxes is only required to the extent that there is a financial penalty for not doing so. Some people automatically accept the penalty rather than pay estimated taxes. Others try to game the system, file appeals, etc. People find strange ways to amuse themselves. If your income fluctuates, you're probably better off paying estimated taxes, even if it is inconvenient. If you have a job, you're probably better off claiming lots of exemptions (typically 14) to reduce your withholding, and then paying enough estimated taxes to get safe harbor. The easiest way to estimate taxes is to pay 100% of your 2007 tax liability, one-fourth each quarter. You can estimate any amount, but if you come up short, you have to pay a penalty (unless you qualify for safe harbor). If you estimate too much, you are making an interest-free loan to the government. [rwk]