If you receive money from cryptocurrency mining, staking, interest, or investing, you will be required to pay quarterly taxes (also known as estimated taxes) to the IRS and your state in order to prevent underpayment fines.
The United States has a pay-as-you-go tax scheme. This ensures that you must pay taxes on your salary while you collect it, rather than at the end of the year. This is why a part of your weekly or biweekly salary is deducted for income taxes. Your company is responsible for income tax withholding.
However, since there is no withholding agent, such as an employer, income tax is not immediately deferred on income sources such as mining, staking, interest, or cryptocurrency capital gains.
In both situations, you must calculate and pay the right quarterly tax sum to both the IRS and the state.
Who Is Required To Pay Quarterly Tax and When?
If you plan to owe $1,000 or more as you file your return, you must make quarterly tax payments for the profits received during each year, as seen in the table below.
How Can You Figure Out Your Estimated Taxes?
To measure your total income, go to page 8 of the Form 1040-ES guidelines. However, if you have a considerable volume of revenue from various non-income tax withheld sources (such as cryptocurrency investing, rental income, company income, and so on), it is strongly advised that you consult with a trained accountant to determine the proper approximate tax sum.
What Happens If You Don’t Pay Your Taxes Quarterly?
If you do not pay your quarterly taxes, you will be subject to an underpayment penalty when you file your tax return the next year. The IRS Form 2210 is used to measure the underpayment penalty. You will escape this penalty if you owe less than $1,000 in tax by deducting withholdings and refunds, or if you pay at least 90% of the tax for the current year, or 100% of the tax shown on the previous year’s return, whichever is less (Safe harbor calculation).
Jennet, for example, was a full-time employee in 2020 who received $40,000 per year. According to Line 24 on her 2020 Form 1040, her tax obligation was $10,000. She agreed to leave her job and sell some of her bitcoins on January 1, 2021. As a result, she received $60,000 in capital returns in the first quarter of 2021. She must pay at least $9,000 (90 percent * $10,000) in quarterly taxes by April 15, 2021, to satisfy the safe harbor and escape an underpayment penalty.
Disclaimer: This article is for informative purposes only and is not meant to be tax advice. Please seek the advice of a tax advisor if you need tax advice.