I had some short term capital gains in 2017 which resulted in underpayment penalties both in my Federal and State taxes. I have about $5K in crypto-related short term capital gains for 2018 to report on my 2018 taxes, and I'd like to avoid paying the underpayment penalties.

How do I go about doing that? Do I file my taxes every quarter? Is that a service TurboTax offers? I've only ever filed my taxes once a year before the April 15 deadline.

  • Do you have tax withholding as a W2 employee or pay quarterly estimated taxes as a 1099 independent contractor? In the former case, elect to have extra withheld from your paycheck, if you employer allows this. If the latter, increase your quarterly payments. – Patrick87 Apr 14 '18 at 18:50
  • @Patrick87, the OP sounds like he has never made quarterly payments before. – BobE Apr 14 '18 at 18:54
  • I’m a W2 employee. My withholdings are 0. Can I have my employer withhold more than that? – David Apr 14 '18 at 18:56
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    @kweinert, that’s not employer-specific; it’s on the IRS W-4 form. – prl Apr 14 '18 at 19:21
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    Just uploaded the 2018 W4 form ( irs.gov/pub/irs-pdf/fw4.pdf) that not only allows additional dollar amount to be withheld it also provides a handy computation for "non-wage income" so that you can adjust your withholding to accommodate income outside of your wages. – BobE Apr 15 '18 at 0:34

Go to irs.gov and download 2018 Form 1040-ES and the instructions.

You can either pay quarterly estimated taxes or increase your withholding from your wages to cover the additional taxes on non-wage income.

Since you already have significant non-wage income for 2018, if you choose to pay quarterly, the first payment is due by Tuesday.* If you increase your withholding, there is less urgency, because withholding is treated as if it is paid equally throughout the year.

I’ve just given an overview here, since this is all explained in more detail in the Form 1040-ES instructions, but come back if you have more questions after looking at them.

Sorry I can’t help with the Turbo-tax question (but I expect the answer is yes).

* If you can’t get it done by Tuesday, still do it as soon as you can, because the interest is computed daily. If you’re only late by a few days or a couple weeks, it won’t amount to much.

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  • If you have already acquired the 5K gain by March 31, then by all means try to get an estimated payment in before April 17. BTW if you download irs.gov/pub/irs-pdf/f1040es.pdf, as prl suggested, the vouchers you need are on pages 9 & 11. – BobE Apr 15 '18 at 0:42
  • Thanks OP and @BobE. Follow up question: after filing 1040-ES, do I need to file estimated taxes for my state as well to avoid the penalty? – David Apr 15 '18 at 3:24
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    You haven’t mentioned your state. Tax laws and procedures are different in every state. In my state, estimated tax works very much like the federal estimated tax. (It’s due on Monday, April 16, not Tuesday, though. I guess they don’t honor the D.C. holiday.) – prl Apr 15 '18 at 6:41
  • @David Probably, depends on your state – BobE Apr 15 '18 at 19:42

The only service (that I'm aware of) from Turbo Tax is the printing of coupons to submit with your estimated quarterly tax payment. Whether you actually send in quarterly payments or not is entirely up to you.

I would have expected Turbo Tax to produce those quarterly vouchers based on your apparent underpayment of 2017 tax.

You don't explain how you obtained your 2017 short term capital gains, but if you obtained then by sale through a broker or financial house you should have been offered the opportunity to make a tax payment.

On the other hand, if the short term gains were the result of churning within a mutual fund, then you may not be aware of the gains until the MF has closed the year.

Either way, the IRS expects that you will pay taxes on earnings when those earnings become available to you, at least within the quarter.

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  • I’ve never known a broker to offer withholding. If they do, they keep the option well hidden. – prl Apr 14 '18 at 18:54
  • I obtained the earnings from Coinbase, a cypro relaed broker. – David Apr 14 '18 at 18:57
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    My limited experience with Vanguard has been that I have been offered the opportunity to make "withholding" payments whenever I sold for a profit, but that's just been my experience – BobE Apr 14 '18 at 18:58

Are you sure you owe the penalty? The rule seems to have an exception for 1 time situations like yours. Basically as long as you paid as much as you owed last year the penalty doesn't apply.

"Topic Number 306 - Penalty for Underpayment of Estimated Tax" says this:

Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

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