Yes, if you anticipate a sizable capital gain on the sale of an investment during the year, you may need to make a quarterly estimated tax payment during the tax year. The requirement to make estimated tax payments generally applies if you expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and if your withholding and refundable credits are expected to be less than the smaller of 90% of the tax to be shown on your current year's tax return or 100% of the tax shown on your prior year’s tax return.
The Internal Revenue Code under § 6654 outlines the requirements for making estimated tax payments. Specifically, § 6654(c) states that there are four required installments for each taxable year, with due dates on April 15, June 15, September 15, and January 15 of the following taxable year. Each installment is generally 25% of the required annual payment, which is the lesser of 90% of the tax for the current year or 100% of the tax for the preceding year.
However, if your income is not received evenly throughout the year, such as in the case of a sizable capital gain, you may be able to use the annualized income installment method. This method allows you to annualize your income at the end of each period based on a reasonable estimate of your income, deductions, and other items. This can result in a lower required estimated tax payment for one or more periods. If you choose this method, you must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with your tax return to show that your uneven estimated payments match up with the income received unevenly over the course of the year.
In summary, if you anticipate a sizable capital gain, you should consider making a quarterly estimated tax payment to avoid underpayment penalties. You can either make regular quarterly payments or use the annualized income installment method to align your payments with your income.
Sources:
Publication 554 (2023)
Publication 513
Publication 505 (2024)
Publication 554 (2022)
§ 6654. Failure by individual to pay estimated income tax
