Why funded trading income isn’t treated like personal trading
As we kick off a new year, most prop traders do the same thing.
They look back at:
And right around that moment, taxes start creeping into the conversation.
“How much do I owe?”
“What can I deduct?”
“Do losses count?”
“Why does this feel so different from personal trading?”
If you’re a funded trader, there’s a good reason those questions feel confusing.
The One Thing Most Prop Traders Get Wrong
You can do everything right as a funded trader.
Pass the evaluation.
Follow the rules.
Get consistent payouts.
And still get blindsided by taxes.
Not because you traded poorly - but because many prop traders misunderstand one critical thing:
Funded trading income is usually not treated as ‘trading income’ for tax purposes.
That sounds counterintuitive. You’re trading charts, managing risk, executing strategies. How could it not be trading income?
Here’s the nuance most traders miss.
Under U.S. tax rules, the tax treatment doesn’t change simply because you’re trading a prop firm’s capital. It changes because most modern, remote prop firms classify funded traders as independent contractors.
Some online prop firms, such as Apex Trader Funding, issue 1099 forms directly to traders. Others, like ThinkCapital and Tradeify, use third-party payment providers such as Rise to handle reporting on their behalf. For U.S. traders, this generally means payouts are treated as non-employee compensation and reported on Form 1099-NEC once total payouts exceed $600 in a calendar year.
Many foreign prop firms do not issue U.S. tax forms at all. However, that does not change the underlying obligation - all income must still be reported, and traders are responsible for reporting their earnings using payout statements and payment records.
Because of this contractor structure, prop trading payouts are generally treated as business income, not capital gains - even though what you’re doing day-to-day feels exactly like trading.
That single distinction explains:
If you’re funded - or working toward your first payout - understanding this early can save you thousands.
A Quick But Important Note
This article is written for U.S. prop traders and reflects current U.S. tax rules. It is for educational purposes only, not tax advice. Every trader’s situation is different, and you should always consult your own qualified tax professional.
Even if you’re not based in the U.S., the core idea still matters because the biggest mistake funded traders make isn’t about tax rates.
It’s about how their income is classified.
The Big Idea
At a high level:
Trade your own capital, and the IRS usually treats you as an investor.
Trade for a prop firm under a contractor structure, and the IRS usually treats you as a service provider.
Even though you’re trading, your prop firm payouts are generally treated as payment for services, not investment gains.
Once you understand that, the rest of the tax picture starts to make sense.
You Only Pay Taxes on What You’re Paid
One common misconception is that traders owe taxes on the total profits generated inside the funded account.
That’s not how it works.
If:
You only pay taxes on $8,000 - the amount actually paid to you.
You are taxed on payouts received, not on:
Scenario: No LLC, No S-Corp (Most Funded Traders)
This is the most common setup for modern online prop traders.
What this looks like
You trade under your own name
No LLC or S-Corp
You receive payouts from a prop firm
You’re classified as an independent contractor
Many U.S. firms issue Form 1099-NEC if payouts exceed $600.
Some foreign firms issue no form - but income is still taxable.
How it’s reported
Reported on Schedule C with your personal tax return
Treated as business income
How it’s taxed
Ordinary income (based on your tax bracket)
Self-employment tax (15.3%) for Social Security and Medicare
(Half is deductible, but you still pay it)
Example: $50,000 in Prop Firm Payouts
You receive $50,000 in payouts during the year.
From the IRS’s perspective:
This is often where traders realize why prop trading taxes feel very different from personal trading taxes.
What About Losses?
This is one of the most common and most misunderstood questions.
❌ Trading losses inside a funded account
These cannot be deducted.
If you:
Those are the firm’s trading losses, not yours.
You don’t own the capital, so there is:
What Can Be Deducted
While trading losses aren’t deductible, out-of-pocket business expenses are.
This is where many traders can meaningfully reduce their tax bill.
Deductions That Matter for Prop Traders
Evaluation and Reset Fees
Evaluation fees and reset fees are generally deductible as business expenses for traders operating as:
Home Office Deduction
If you trade from home, you may qualify for a home office deduction.
This can include a portion of:
The deduction is typically based on the square footage used exclusively and regularly for trading.
This is an area where working with a tax professional is strongly recommended.
Trading-Related Expenses
Common deductible expenses include:
These deductions reduce taxable income and often reduce self-employment tax as well.
Entity Structure and Tax Planning
Your entity structure - sole proprietorship, LLC, or S-Corp can affect:
For consistently profitable traders, an S-Corp may offer meaningful tax savings but it adds complexity and should be set up with professional guidance.
This is where a trader-savvy tax professional can make a big difference.
State and Local Taxes
Federal taxes are only part of the picture.
Prop traders also need to consider:
State-level differences can significantly impact total tax burden.
Estimated Tax Payments (Very Important)
Most funded traders have no taxes withheld from payouts.
That means you’re expected to make quarterly estimated tax payments to the
Internal Revenue Service and to your state if applicable.
Failing to do this can lead to penalties and interest.
Many traders set aside 25 to30% of each payout into a separate account to stay ahead of this.
Record Keeping Is Non-Negotiable
Good records make everything easier.
You should keep organized records of:
Strong record-keeping supports deductions and is essential if you’re ever audited.
The Bottom Line
As you reflect on last year’s wins and losses, here’s the takeaway every funded trader should understand early:
Prop trading income usually isn’t trading income.
It’s compensation and it’s taxed that way.
Once you understand that, tax planning becomes clearer and far less stressful.
And because every trader’s situation is different, we strongly recommends working with a qualified tax professional who understands both trading and self-employment income.
Disclaimer
This article is for educational purposes only and does not constitute tax, legal, or financial advice. It reflects U.S. tax rules as of 2025–2026. Tax laws change, and individual circumstances vary. Always consult a qualified tax professional.