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The U.S. has a pay-as-you-earn tax system. That means, when you get a paycheck from your employer, taxes are withheld throughout the year. When you run a business, you pay quarterly taxes. When you owe more than $1,000 in capital gains for the year, you should be making quarterly payments as well. Here is IRS’s guidance on quarterly taxes for capital gains.
You should be making your best estimates and if you overpay or underpay, you can correct this at the end of the year using Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts). If you do not make estimated quarterly payments when required, or underpay too much, there are fees.
Q: Who is required to make 2018 federal quarterly estimated tax payments?
A: The IRS requires “quarterly” estimated tax payments if both:
- You expect to owe at least $1,000 in federal tax for 2018, after subtracting federal tax withholding and refundable credit, and
- You expect federal withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your 2018 federal tax return, or
- 100% of the tax shown on your 2017 federal tax return (only applies if your 2017 tax return covered 12 months otherwise refer to 90% rule above only).
You also do not have to pay 2018 federal quarterly taxes if:
- You had no tax liability for the prior year, and
- You were a U.S. citizen or resident for the whole year, and
- Your prior tax year covered a 12-month period
Q: Do Federal Quarterly Estimated Tax Payments apply to cryptocurrency?
A: Yes. The IRS has issued guidance that cryptocurrency is taxed as property, and therefore any resulting capital gain income (short term or long term) is subject to tax and quarterly estimated tax payments.
Note: if you are recently entering into cryptocurrency trading, this may apply to you for the first time. As an employee of a company, your employer is responsible for automatically withholding tax from your paycheck on an ongoing basis, however for your own cryptocurrency trades, you are responsible for paying the quarterly tax on the capital gains.
Q: How do I calculate the amount of my federal quarterly estimated tax payments?
A: Estimate your adjusted gross income, taxable income, taxes, deductions, and credits for the 2018 calendar year. Form 1040-ES has an Estimated Tax Worksheet to help.
To calculate your cryptocurrency capital gains, you can purchase a 2018 CoinTracker tax plan here. On the tax page, you’ll then be able to download your capital gains report and sum the capital gains for the relevant period. Finally, you can apply your tax rate to estimate the tax owed.
Q: What are the filing deadlines for federal quarterly estimated tax payments?
* You don’t have to make the payment due January 15, 2019, if you file your 2018 tax return by January 31, 2019, and pay the entire balance due with your return.
Q: How can I make federal quarterly estimated payments to the IRS?
A: The IRS provides various options, for example:
- Credit an overpayment on your 2017 tax return to your 2018 estimated tax
- Pay online (Reason for Payment: Estimated Tax | Apply Payment To: 1040ES | Tax Period for Payment: 2018)
- Pay by mail or phone (instructions on page 4)
Q: What if I don’t pay in time?
A: You may be required to pay an additional penalty. Please refer to IRS Publication 505 for details.