The tax on the Short-Term Capital Gain (taxed as ordinary income) cannot be avoided. The question is whether a penalty would be assessed for underpayment of estimated taxes. It’s entirely possible the penalty can be avoided if either of the safe harbor rules apply. They are:
- The amount you end up owing is less than $1,000.
- Your tax withholding for the year is 90% of this year’s tax liability or 100% of the previous year. (110% of the prior year tax liability if AGI is > $150,000 MFJ/$75,000 SINGLE
A taxpayer could win the Lottery in January of the current year but as long as he/she had 110% of last year’s W-2 withholding by years end the Underpayment of Estimated Taxes Penalty is avoided.
In addition, the fact that this transaction takes place at years end minimizes the penalty if assessed. The penalty is, in effect, paying the IRS the interest they were unable to collect on the required Estimated Quarterly Payment. Interest, of course, is a function of time and rate; time, in this transaction is minimal.
