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Thanks for all the replies. It is such a great community to be in.

After reading some articles online, I reached the same conclusion as Debrak, i.e tax should only be imposed on earning from the excess amount($400). The only tax I owe here is 10% of whatever earning amount.

I talked to Sharebuilder this morning again. They said that I can elect to have no Federal tax withholding or any amount above 10% of entire amount. However, I have to specify an amount for State tax according to some state law of California. The default is 10% on the entire amount but I can elect any amount other than zero.

Basically they don't want to bother to distingish the excess amount part and earnings part, and just impose a standard rate of 10% Federal tax + 10% CA, unless the investor elect to do otherwise.

Based on my calculation of earning, I owe about $3 tax (10% of earning $30 on $400). My question is do I elect no federal tax withholding and put minimum, say $1, for CA tax, or just let they withhold at standard tax rate (10%+10% of 400=$80) and get refund of $77 upon tax filing. Will I get any trouble for not paying $3 for now in case of the first option? How difficult is it to get the $77 refund later in case of the second option?

Obviously, I don't want to overpay my tax but I also want to avoid any troubles for tax return. Any suggestions will be highly appreciated.


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