What Can I Write Off Using A Prop Trading Firm

Understanding Proprietary Trading and Tax Implications

What Is a Prop Trading Firm?

A proprietary trading firm—commonly called a “prop firm”—is a financial institution that lets you trade the firm’s capital instead of risking your own. In return, the firm typically takes a cut of your profits. Think of it like being a quarterback with a team supplying the playbook, stadium, and gear—all you have to do is show up and make the plays.

This model has exploded in popularity thanks to remote trading, scalable evaluations, and structured funding programs. Whether you’re working with big players like FTMO or emerging challengers like MyForexFunds or Topstep, prop trading firms provide access to significant capital without requiring personal investment. But as appealing as this sounds, it comes with a side dish of tax complexity—something every trader should understand before year-end rolls around.

How Prop Traders Are Paid

Most prop firms use a revenue split model, commonly ranging from 75/25 to 90/10, favoring the trader. That means if you make $10,000, you might keep $9,000, and the firm pockets $1,000.

However, since you’re technically not an employee, you don’t get a W-2. Instead, many traders receive a 1099-NEC or equivalent depending on jurisdiction. Some firms also use digital wallets or crypto, which adds a whole new layer of tax intrigue (and IRS attention).

Why Taxes Are Different for Prop Traders

Prop trading income isn’t always neatly classified as capital gains like traditional investing. It often gets labeled as self-employment income, which means you’re responsible for your own taxes—both income tax and self-employment tax (yes, the IRS wants both pieces of your pie).

This difference matters because the deductions you’re eligible for—and the way you file—can vary dramatically. If you treat your prop trading like a business, the IRS might allow you to deduct a range of expenses. But mess it up, and you might miss out on thousands in tax savings or trigger an audit.

How Income from Prop Trading Is Taxed

Capital Gains vs. Ordinary Income

Here’s where things get spicy: not all trading income is treated equally. If you trade through a personal brokerage account, you’re likely dealing with capital gains. But as a prop trader, your income might be classified as ordinary income, especially if you’re trading frequently and receiving profit splits.

This matters because capital gains are taxed at a lower rate (0% to 20%) while ordinary income can climb up to 37%. Ouch, right?

Revenue Split and Performance Fees

Let’s say your firm gives you 80% of profits. That share is your taxable income. But wait—can you deduct the firm’s 20% as a business expense? Unfortunately, no. The IRS treats it as “not your income to begin with,” so you only report your cut.

However, fees paid to the firm for evaluation, subscriptions, and withdrawals? Those might be deductible. More on that soon.

Self-Employment Tax Considerations

Because you’re an independent contractor, you’re liable for self-employment tax, which is 15.3% on net earnings up to a cap (and additional Medicare tax after that).

But here’s the kicker—you can deduct half of this tax on your Form 1040. It’s one of the few perks of this setup, so don’t forget it.

Trading Entity vs. Individual: Tax Differences

Forming an LLC or S-Corp can help you legally reduce tax liability and unlock more deductions. As a sole proprietor, your options are more limited and scrutiny is higher. We’ll dive deeper into this when we discuss business structures.

Tax Deductions and Write-Offs for Prop Traders

Home Office Deduction

If you’re trading from your bedroom, spare room, or that corner you’ve turned into a trading dungeon—good news. The IRS allows a home office deduction if that space is used exclusively and regularly for business.

You can choose between two methods:

• Simplified Method: $5 per square foot, up to 300 sq ft.
• Actual Expense Method: A portion of rent, mortgage, utilities, and maintenance based on the square footage used for trading.

But remember: no gaming, Netflix, or family dinners in your trading space—or the IRS might call foul.

Software, Subscriptions & Trading Tools

From TradingView to MetaTrader add-ons and market scanners like Bookmap, most professional trading tools are deductible if used in your business. That includes:

• Data feeds (e.g., Level II quotes)
• Market research subscriptions
• Charting platforms
• Algo tools and backtesting systems

Just make sure you’re not also using them solely for personal investments—business use must be your primary purpose.

Evaluation & Platform Fees

The cost of prop firm evaluations (think FTMO’s $155 fee or Apex’s $80 fee) may be deductible as startup or training expenses, depending on whether you pass and earn funding.

If you’re actively trading and generating income from a firm, ongoing platform access fees are 100% deductible as necessary business expenses. Keep every receipt, and record whether the fee was refundable or part of a challenge.

Internet, Phone, and Utilities

Your internet connection is like your trading lifeline. So yes, a portion is deductible if it’s used to run your trading business. The same goes for:

• Cell phone bills (business use portion)
• Electric bills (if trading space is part of your home office)
• Hardware maintenance (routers, modems, etc.)

Pro tip: Document usage with a time log or percentage allocation based on business vs. personal use.

Continuing Education and Courses

That $500 Udemy course on technical analysis? The mentorship program that gave you your edge? Education directly related to your trading business is tax-deductible under IRS Publication 970.

This includes:

• Webinars
• Online courses
• Trading bootcamps
• Mentorships and coaching programs

Just make sure the training enhances your current skill set and isn’t a total career shift.

Travel and Networking Events

Attending the Traders Expo in Las Vegas or flying to a prop firm seminar in New York? Congrats—you might be able to deduct:

• Airfare
• Hotel costs
• Meals (usually at 50%)
• Transportation

Just keep the receipts and tie the event directly to your business. And no, Vegas slots don’t count as research.

Accounting and Legal Fees

If you hire a CPA to file your taxes or consult with a lawyer about forming an LLC or handling a dispute with a prop firm, those fees are 100% deductible.

Even tools like TurboTax Business or QuickBooks for self-employed traders count if used to manage your trading records.

Prop Firm Fees: Are They Deductible?

Yes—and no. Here’s the nuance:

• Challenge fees (if passed): Often deductible as a startup or business expense.
• Monthly platform fees: Deductible if trading is ongoing.
• Fees for failed evaluations: Deductible if trading is your main profession, and you’re actively pursuing funding as part of your business model.

When in doubt, document everything and consult a tax professional.

Choosing the Right Business Structure

Sole Proprietorship vs. LLC vs. S-Corp

Most traders start as sole proprietors by default, but this can limit your deductions and increase audit risk. Forming an LLC or electing S-Corp status can offer protection and tax advantages.

• Sole Proprietor: Easy setup, but all income is subject to self-employment tax.
• LLC: Offers liability protection and flexibility; taxed as sole prop, partnership, or S-Corp.
• S-Corp: Reduces self-employment tax via salary/distributions, but requires payroll and strict compliance.

Pros and Cons of Each Structure