Not only that... But I've had several years where my 4th quarter was big. (Partly due to catching gains from positive seasonality and partly due to having more capital from gains earlier in the year.) I've often paid a penalty for not having "paid on time". I asked a CPA about it, and he said, "... the system presumes your earnings for which estimate are made are evenly distributed through the year... so when you get a big gain in Q4, you didn't pay in 'evenly' and are so penalized..." And of course I exclaimed, "WTF?" "How am I supposed to know I'm going to have big profits in Q4?" He said, "yup... dirty deal, but that's how it works..." So.... in order to avoid a penalty tax and interest charges, you need to ANTICIPATE your Q4 will be big and pay in an estimate before you even make the gain... that is, if you do make the gain... How do you like THEM apples?
Trading 15 years, 12 of which were profitable. Never filed or paid estimated taxes. Filed 1040, 1099B, with form 6781 for 1256 contracts by April 15th. Never had a single problem from the IRS. No audits, penalties or notices. (Incidentally, never a thank you either, considering.) Same for interest on Muni bonds. No election of trader status either. Best bet, consult a tax advisor, preferably one with commodities knowledge and not just general securities or stock trading knowledge.
You are very fortunate if you are paying the IRS more than $1000 every April 15th and they are not coming after you for interest and penalties. Perhaps you have somehow made that special list of VIPs that the IRS never hassle. All of us normal taxpayers with significant nonwage income have to make the estimated payments quarterly or pay extra come April 15th or when the IRS notice arrives.
Listening to someone who is ignorant of the Law and proud of it is like listening to the clever person who thought hiding his money offshore would help avoid taxes. Look at what is happening to UBS now. It works, until it doesn't. And then, the pain can be severe when they catch you. Funny thing, you cannot bankrupt out of paying taxes, fines, interest and other IRS activities...
Forgive my ignorance--thanks again to everyone who contributed to this thread. I have a question: We are taxed (futures traders) on our gross profits minus our gross losses--I think this is the jist of the 1099 form we get from our brokers? Now--if we are actually meant to make quarterly payments, is each quarter a self contained gross profits minus gross losses? For e.g.: if I don't trade in Q1, make 10K in Q2, and then proceed to lose 9K in Q3 and Q4, if I file at the end of the year, I'll pay the taxes on the 1K in net profits. However, if I pay quarterly, I'd end up paying the full % on the 10K in net profits in Q2-- then proceed to lose most of that in Q3 and Q4? If you overpay in a specific quarter such as the example outline, does the government then reconcile it with the 1099 and issue a refund? Forgive me if this is really cryptica and/or amateurish--I just recently reached a point where I need to start planning this stuff. Cheers!
If you overpay, you would get a refund when you file your return with 1099B & 6781. The sooner you do it post Dec 31, the sooner you would get it back.
I'm not on a special list or fortunate. Like I said, consult with a tax advisor who specializes in commodities trading. Too many tax advisors have simple general knowledge of taxation when it comes to securities and capital gains generated from the sale or disposition of those securities.
I have been making quarterly estimated tax payments for over 30 years. The IRS rules specified on Form 1040ES say I have to make them and my brother the CPA says I have to make them. I don't want to pay the IRS any extra, so I do what is required. I have known a number of people over the years that should have made estimated tax payments due to capital gains or extra dividends/interest and they all got hit with penalties and interest for underpaying their taxes during the tax year after they filed their tax returns. And the states involved (NY, NJ and PA) also hit them with penalties and interest for underpaying their taxes during the tax year.
A few things: 1. It's not penalties and interest for underpayment/non-payment of estimated tax. It's just interest as the penalty on the amount of tax underpaid or not paid. 2. The penalty interest, if assessed, will add to your total combined state and federal tax liability to the tune of about .25% to 2% depending on your tax bracket, the state you live in and the penalty amount per quarter which ranges from 4% to 8% in recent years. For 1256 contract traders, since you don't file a schedule D (though required to keep personal record of transactions for 7 yrs), the IRS doesn't know precisely when you made your capital gains. So they will simply divide the cap gains tax liability (as computed from your 1099B) by 4 and apply the penalty interest per quarter on a annualized basis. Meaning, 1st quarter interest will be higher than the subsequent quarters with last quarter's interest being roughly 75% less than Q1's.. For some 1256 contract traders, risking not filing the 1040ES and paying the penalty interest might be a better way to go. If your P/L at the end of the year is negative because you suffered a draw down, and is reported as such on your 1099B, you would have done a lot worse if during that year you were paying estimated tax. Sure, you'd get a refund if you paid estimated taxes in the year that you ended up with a negative or lower than anticipated P/L. But that's money you could have used to trade with. 3. It comes down to an opportunity cost. Remember, the IRS only knows how well/bad you did with a 1099B. You enjoy 60/40 tax treatment as well if you're a 1256 contract trader. No matter what, you will pay less tax than a stock trader or wage earner at the same income level. So, do you pay the penalty if assessed (which by the way they will calculate for you if you don't want to bother doing it yourself with a form 2210) and lose trading capital to the tune of ~ 20% to 30% each quarter? Or do you wait for year end 1099B and lose .25 to 2% additional in extra tax penalty interest? Something to think about if you're not consistently profitable month to month or year to year. Paying a penalty isn't the end of the world and doesn't make you a "bad person." It's a business decision. Pay-as-you-go tax system works best for those who are paid by an employer or have fairly steady income. What's more, if the IRS detects/determines that you should have paid the estimated tax, they are forthright about billing you. They don't sit on their hands about it. Bill would come at most a few weeks to two months after you file and pay what you thought or calculated you owed without respect to any penalty interest. So it's best to file as soon after one gets a 1099B. 4. If a trader had negative p/l for the year or didn't make enough to owe taxes after deductions, then they generally don't have to worry about estimated taxes or being assessed a penalty due to "safe harbor" rule for the following year.
There is an annualized income form that you can fill out when your income comes sporatically as in a little during the year but alot in the 4th quarter.