I will be trading futures exclusively for the next year while taking no salary, income, or draw. Being subject to taxation solely on 1256 contracts leaves me down the path that I can settle up at year end. Again, I am trading futures only. I will be trading heavy volumes. My question is: do I have to pay estimated taxes on a quarterly basis? I still have not found a straight answer from anyone on here and greentradertax is a dead end due to their desire for entity formation and money. I am highly capitalized with a six figure cash and a segregated six figure brokerage account. Accounts have not been formed yet, no entities have or will be formed this year. Access to capital is not a problem for me. Wasting my time and $500 to $1000 going to a tax accountant and/or lawyer is not of interest to me. Thanks, boys.
All your answers are here: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
Short answer, YES, absolutely. In general you have to pay estimated tax on ANY income and all income is assumed to have been received equally over the year. If you don't pay estimated tax you're hit for interest for the time it was unpaid, i.e. 9 months for Q1 estimated tax, 6 months for Q2.... There is an exception if you make all your money in Q4 as the result of a specific event, like you sell something big, for example, in which case you can request to consider it all Q4 income. The other loophole is if you have a business that is paying withholding tax for you. You could have the business withhold most of your withholding on Dec 31st and the IRS considers that to have been withheld evenly over the year for purposes of calculating estimated tax penalties, regardless of if this company has anything to do with trading.
Do you think you are going to make profit this year? If so, pay some estimated tax. Because if all your trading turns into a loss by the end of the tax year, you'll get the estimated tax payments as a refund. But if you manage to make profit for the year, you won't be incurred a penalty for filing the estimated tax. Here's another way to think of it... If you make $1,000,000 in January, then on April 1st you file an estimated tax for $250,000 at a rate of 25%, fine. You've paid your quarterly taxes in estimation. If on April 2nd, you lose that $1,000,000 profit and never make it back for the rest of the year, then surely you would not be paying any more estimated tax each quarter. By the end of the year, your yearly income is zero, and you've paid $250,000 in taxes you do not owe at the end of the year. Yes, I believe the IRS wants those estimated taxes filed on a quarterly basis. But since 1256 traders can make or lose all their money in a day, the estimated tax thingy is not a simple thing to figure out. And if yer paying $500-$1000 to an accountant to file those forms? Jeez, find a new accountant! That is way too high in pricing.
If you are sure you are going to make a profit for the year, then paying estimated taxes will save you money in terms of paying interest penalties come tax time. If you aren't sure, then maybe it is best not to pay anything until tax time rolls around. In my book, there is nothing worse than pre-paying taxes that you don't owe. And again, estimated tax payments are not required as long as you are willing to pay interest penalties.
Based on my experience, the IRS can be forgiving if they see at least an attempt to file quarterly taxes of some kind. They understand that many sources of income are irregular. What can get you into trouble is if you show income, but have made no effort at filing quarterlies. Thus, if there is any chance that you may be showing income, file even a couple hundred dollars each quarter, and a larger payment in the final quarter if you are making sizable gains. If you have overpaid during the year, the money will be coming back to you.
This seems like a good way to avoid scrutiny. Plus, how likely is the IRS to go digging to determine exactly when the income occurred? Unlikely unless there is something else on your return that will trigger an automatic red flag.
We independent traders don't have a lot of overhead net of trade fees. I have no issue with paying a CPA to do my taxes each year.