If you earn cryptocurrency income via mining, staking, interest, or trading, you might have to pay quarterly taxes (also known as estimated taxes) to the IRS and state to avoid underpayment penalties.
What Are Quarterly Taxes?
The US has a pay as you go tax system. This means you are required to pay taxes on income as you earn them and not at the end of the year. This is the reason why a portion of your weekly or bi-weekly paycheck goes towards income taxes. Income tax withholding is done by your employer.
However, income tax is not automatically withheld for income streams like mining, staking, interest or cryptocurrency capital gains because there’s no withholding agent like an employer.
In these cases, you are responsible for calculating the correct quarterly tax amount and pay to the IRS and the state.
Who Must Pay Estimated Tax and When?
If you expect to owe $1,000 or more when you file the return, you are required to submit quarterly tax payments for the income earned in each period as indicated on the table below.
How Do You Calculate Your Estimated Taxes?
You can use page 8 of Form 1040-ES instructions to calculate your estimated taxes. However, if you have a large amount of income coming from multiple non-income tax withheld sources (Crypto trading, rental income, business income, etc.) it is highly recommended to use a qualified accountant to calculate the correct estimated tax amount.
What Happens If You Don’t Pay Quarterly Taxes?
If you don’t pay quarterly taxes, you will have to pay an underpayment penalty when filing your tax return in the following year. The underpayment penalty is calculated on Form 2210. You can avoid this penalty if you owe less than $1,000 in tax after subtracting your withholdings and credits, or if you paid 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 (Safe harbor calculation).
For example, Jennet was a full time employee during 2020 who earned $40,000 in annual salary. Her tax liability was $10,000 according to her 2020 Form 1040 Line 24. On January 1, 2021 she decided to quit her job and sell some of her bitcoins. As a result, she made $60,000 in capital gains in 2021 Q1. To meet the safe harbor and avoid an underpayment penalty, she has to pay at least $9,000 (90% * $10,000) of quarterly taxes by April 15, 2021.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.