Prop Firm Taxes: Complete Tax Guide for Funded Traders [2025]

Prop firm taxes confuse many traders—are you an employee? Independent contractor? How do you report profits from funded accounts? The tax treatment of prop firm income depends on your location, firm structure, and whether you pass evaluations with real or simulated capital. This comprehensive guide covers prop firm tax obligations for traders in the US, UK, EU, and beyond in 2025.

Prop Firm Taxes: Understanding Your Tax Obligations

Understanding prop firm taxes starts with knowing your classification. Most modern prop firm traders are NOT employees—you're typically classified as independent contractors receiving profit splits.

The Key Question: Real Capital vs Simulated

Your tax treatment depends heavily on whether you're trading real or simulated capital:

Real capital firms: You're trading actual firm funds—profit splits are typically taxable income
Simulated/demo accounts: You're trading demo accounts with profit payouts—treatment varies by jurisdiction

Most modern prop firms use simulated trading during evaluations and often during funded phases as well, with payouts based on performance.

US Prop Firm Tax Treatment

Do Prop Firms Send 1099?

The question "do prop firms send 1099" is common among US traders. The answer depends on the firm:

US-based firms: Should send 1099-NEC if they pay you $600+ annually
International firms: Generally do NOT send 1099s (FTMO, TradersYard, FundedNext are non-US)
Your obligation: You must report ALL income regardless of whether you receive a 1099

How US Traders Report Prop Firm Income

As an independent contractor receiving profit splits:

Schedule C (Form 1040): Report prop firm income as self-employment income
Self-employment tax: Pay 15.3% SE tax (Social Security + Medicare) on net earnings
Quarterly estimates: Make quarterly estimated tax payments if owing $1,000+ annually
Deductions: Deduct trading-related expenses (software, education, home office)

Deductible Expenses for US Prop Traders

Common deductions include:

Evaluation fees (business expense)
Trading software and data feeds
Computer equipment (depreciated or Section 179)
Trading education and courses
Home office (if dedicated space)
Internet (business portion)

UK Prop Firm Tax Treatment

HMRC Classification

UK traders face interesting tax questions with prop firms:

Trading income: Generally treated as self-employment income
Not gambling: Prop trading is NOT the same as spread betting (which is tax-free in UK)
Self Assessment: Report on Self Assessment tax return

UK Tax Rates on Prop Firm Income

Income tax bands apply to your profit splits:

Personal Allowance: £12,570 tax-free
Basic rate (20%): £12,571 to £50,270
Higher rate (40%): £50,271 to £125,140
Additional rate (45%): Over £125,140

Plus National Insurance contributions if earning above thresholds.

UK Spread Betting vs Prop Trading

Important distinction:

Spread betting (your own account): Tax-free in UK as classified as gambling
Prop firm trading: Taxable as trading income (you're providing a service)

The profit split arrangement makes prop trading a business activity, not gambling.

EU Prop Firm Tax Treatment

General EU Principles

EU countries vary, but common principles apply:

Prop firm income is generally taxable
Usually treated as self-employment or freelance income
VAT may apply in some jurisdictions
Social contributions often required

Country-Specific Considerations

Germany:

Income tax (progressive rates up to 45%)
Solidarity surcharge (5.5% of income tax)
Health insurance obligations

Netherlands:

Box 1 income (progressive rates)
ZZP (self-employed) registration may be required

Ireland:

Self-employed income tax rates
USC (Universal Social Charge) applies
PRSI contributions

Other Jurisdictions

Dubai/UAE

Popular among traders for:

0% personal income tax
No capital gains tax
Legitimate tax planning option for relocating traders

Singapore

Favorable tax treatment:

Low income tax rates (0-22%)
No capital gains tax
Trading income taxable as business income

Australia

Standard treatment:

Assessable income on tax return
GST may apply if turnover exceeds threshold
Progressive tax rates apply

Record Keeping for Prop Firm Taxes

Essential records to maintain:

Income Records

All payout receipts from prop firms
Payment processor statements (Wise, Payoneer, etc.)
Bank statements showing deposits
Trading account statements

Expense Records

Evaluation fee receipts
Software subscription invoices
Equipment purchase receipts
Education/course receipts

Trading Records

Monthly/annual profit statements from each firm
Challenge pass/fail history
Account scaling history

Common Tax Mistakes Prop Traders Make

1. Not Reporting International Income

Just because FTMO or TradersYard don't send tax forms doesn't mean income is tax-free. You must report all worldwide income.

2. Missing Quarterly Estimates

US traders owing $1,000+ annually should make quarterly payments to avoid penalties.

3. Forgetting Deductions

Evaluation fees, software, and equipment are deductible business expenses—don't leave money on the table.

4. Confusing Trading Income Types

Prop firm profit splits are business income, not capital gains. Different tax treatment applies.

When to Hire a Tax Professional

Consider professional help if:

Earning significant income ($50K+) from prop trading
Trading with multiple firms across jurisdictions
Considering international relocation for tax purposes
Running other businesses alongside trading
Unsure about proper classification or reporting

A CPA or tax advisor familiar with trading income can save you money and prevent costly mistakes.

Frequently Asked Questions

How are prop firm taxes handled?

Prop firm taxes are typically handled as self-employment or business income. You report profit splits on your tax return as independent contractor income, pay applicable income taxes, and can deduct related business expenses like evaluation fees and software.

Do prop firms send 1099?

US-based prop firms should send 1099-NEC forms for payments over $600. International firms (FTMO, TradersYard, FundedNext) generally don't send 1099s, but you must still report this income on your US tax return.

Is prop firm income taxable?

Yes, in most countries. Prop firm profit splits are considered taxable income—either as self-employment income, business income, or freelance earnings depending on your jurisdiction. Very few countries offer tax-free treatment.

Can I deduct evaluation fees on taxes?

Yes. Evaluation fees are deductible business expenses in most jurisdictions. Keep receipts and record them as cost of doing business when filing your taxes.

Do I need to pay taxes on failed challenges?

Failed challenge fees are expenses, not income. You don't owe taxes on money you spent on evaluations—these are deductible business expenses that reduce your taxable income.

Is prop trading tax-free in the UK?

No. While spread betting with your own funds is tax-free in the UK, prop firm profit splits are taxable as trading/business income. The profit-sharing arrangement is a business activity, not gambling.

Tax Planning Tips for Prop Traders

Track everything: Use accounting software to categorize income and expenses
Set aside taxes: Reserve 25-35% of profits for tax obligations
Make quarterly payments: Avoid penalties by paying estimates on time
Maximize deductions: Don't miss legitimate business expenses
Consider entity structure: LLC or corporation may offer benefits at higher income levels
Get professional advice: Tax laws are complex—professional guidance pays for itself

Conclusion

Prop firm taxes don't have to be complicated once you understand the basics. In most jurisdictions, profit splits are taxable as self-employment or business income. Keep good records, make timely payments, and don't forget to deduct legitimate business expenses like evaluation fees.

The key points: report all income regardless of whether you receive tax forms, maintain detailed records of both income and expenses, and consider professional tax advice as your trading income grows.

Looking for a prop firm with straightforward payouts? TradersYard offers evaluations from €36 with transparent rules and sub-4-hour payouts via your choice of payment methods. Their scaling to $500K and 80-95% profit splits make tax planning simpler with clear, consistent income. Start your evaluation today.