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I bought and sold some stock with a little bit of profit earlier this year. First time for me and I noticed the stock trading company has not withheld any taxes. I don't want to pay a fine because of withheld less amount. Can I send IRS money before the year is up? Would appreciate some guidance.

Warm Regards, ~ash

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I assume US as mhoran_psprep edited, although I'm not sure IRS necessarily means US. (It definitely used to also include Britain's Inland Revenue, but they changed.)

(US) Stockbrokers do not normally withhold on either dividends/interest/distributions or realized capital gains, especially since gains might be reduced or eliminated by later losses. (They can be required to apply backup withholding to dividends and interest; don't ask how I know :-)

You are normally required to pay most of your tax during the year, defined as within 10% or $1000 whichever is more, by withholding and/or estimated payments. Thus if the tax on your income including your recent gain will exceed your withholding by 10% and $1000, you should either adjust your withholding or make an estimated payment or some combination, although even if you have a job the last week of December is too late for you to adjust withholding significantly, or even to make a timely estimated payment if 'earlier in the year' means in an earlier quarter as defined for tax (Jan-Mar, Apr-May, June-Aug, Sept-Dec). See https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes and for details its link to Publication 505.

But a 'safe harbor' may apply since you say this is your first time to have capital gains. If you did not owe any income tax for last year (and were a citizen or resident), or (except very high earners) if you did owe tax and your withholding plus estimated payments this year is enough to pay last year's tax, you are exempt from the Form 2210 penalty and you have until the filing deadline (normally April 15 but this year April 18 due to weekend and holiday) to pay. The latter is likely if your job and therefore payroll income and withholding this year was the same or nearly the same as last year and there was no other big change other than the new capital gain.

Also note that gains on investments held more than one year are classified as long-term and taxed at lower rates, which reduces the tax you will owe (all else equal) and thus the payments you need to make. But your wording 'bought and sold ... earlier this year' suggests your holding was not long-term, and short-term gains are taxed as 'ordinary' income.

Added: if the state you live in has a state income tax similar considerations apply but to smaller amounts. TTBOMK all states tax capital gains (and other investment income, other than interest on exempt bonds), and don't necessarily give the lower rates for long-term gains. And all states I have lived in have 'must have withholding or estimated payments' rules generally similar to the Federal ones, though not identical.

  • I would add this all goes out the window if the stock is in a foreign company. In this case reciprocal tax agreements will force foreign brokers to withhold gains. – trejas Dec 29 '16 at 4:03
  • For high earners, the "safe harbor" is 110% of last year's tax rather than 100% of last year's tax. Also, the estimated tax payments have been made as 4 equal timely installments. For unequal (but timely) installments, more work might be needed (use the annualization method on Form 2210) to reduce the penalties; the IRS, which offers to compute the penalty and send the taxpayer a bill, does not know the details needed to use the annualization method and so uses the short version of Form 2210. – Dilip Sarwate Dec 29 '16 at 17:55

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