Yeah, I see what you mean. Following on your example, Let's say I started the year with 50K, but during the year I keep withdrawing the profits and spend them all. I always maintain the account at 50K level, so I ended the year with 50K in my broker (But the statement will tells me that I have a total of 5K in gain, despite I spent them all) Now, here's the problem, I won't have any profits left covering my tax, and end up taking out money from my insitial 55K capital to pay tax. So the consideration is about how I can plan ahead for tax, so I limit myself to a certain amount I can spend from the profits, the rest is left for tax. I know some people only take profits once a year, so they can easily manage their accounting. But more likely, we withdraw profits more frequently than that. That's why this kind of calculation disturb me.
Yes, you are in fact trapped in a stupid mindset. Your assumption is that you should be able to predict, for tax planning purposes, what your gains/losses will be at the end of the year. But you can't. It's the same challenge faced by anyone who is self-employed.
You spend it all, have a bad week, blow your account but still owe 20K tax then your in the shit, put 20% or whatever of what you withdraw into a 2nd account and keep it safe for tax payment time.
That's my initial thought as well. But how do I know the right percentage of profits to set aside ? Say If someone is very profitable, he end up sitting in a high tax bracket at the end of the year (45%). But throughout the year, he wouldn't be able to predict him to be doing very well for the year, he does not know whether he would end up sitting in a 20% tax bracket, 40%, or enven 50% So do we need to constantly adjust the percerntage of profits to put in that 2nd account ? Let's say I make 2K in a trade, okay, I withdraw the money, set aside 20%. But then , I make 20K in another trade, I withdraw the money , set aside 35% rather than 20%. It just feels like difficult to prepare the right amount for tax thoughout the year. Unless one is being extremly frugal, conserve most of his profits. The other way is to only withdraw profits once a year right after paying tax.
So do I just pick a percentage with instinct, and evrytime I need to withdraw money, I set aside this percentage of profit in my 2nd account for tax. I am not sure if this is what most traders do ? But more or less, there will be discrepancy.
Traders outthere, let me know how do you withdraw profits and organise your tax amount. I don't wanna mess up with Uncle Sam
UK when you hit high tax bracket, 40% that's only after your Low tax bracket amount, so at that point, you just increase to 45%, if you blow the account you get to maybe take some out of the tax fund to try again If you have a losing week/month then guess you can take the tax out of your fund aswell. Buy yeah, not hard math's, >50K 45%, below 20% best to be a bit over than under I guess.
Great, I see what you mean. So in order to track the current tax bracket, I will need to record every trade in a tax software and look at the 'Net Value'. Then I can maintain the relationship between my tax fund and profit withdrawal would this be a good solution ?
You're over-complicating it in your mind. Just set aside a standard rate of your profits for tax. I'd choose 33%. If at the end of the year you are above or below that by a few points, it won't break your bank if you owe, and make your day if you are owed.