Prop firm taxes

Updated 24 September 2026 by the Prop Firm Pal editorial team. General information for US federal tax, with a short note on the UK. It is not tax advice: tax treatment depends on your circumstances, state and country. Confirm with a qualified tax professional before filing.

At most retail firms you trade a simulated account and the firm pays you a reward based on the result. You never own the positions, so the payout is compensation from the firm rather than a gain on an investment. Topstep, for example, tells traders they are independent contractors, not employees, and to report payout amounts as regular income.

That generally rules out capital-gains treatment — including the 60/40 rule for Section 1256 futures contracts reported on Form 6781, which applies to contracts you hold. A trader promoted to a live account may be in a different position; ask a professional.

A US firm paying a US contractor reports nonemployee compensation on Form 1099-NEC once payments reach the reporting threshold. The IRS instructions set that threshold at $2,000 for payments made in 2026; for earlier years it was $600. The firm files the same form with the IRS, which is how a firm “reports to the IRS”.

Many firms are not US companies and send no form at all. That does not change what you owe: income is reportable whether or not a 1099 arrives. Payments through platforms such as Rise, PayPal or crypto may produce other records; keep your own.

For a US trader treated as self-employed, the usual steps are:

• Total the payouts you actually received in the calendar year — not the account’s profit. Topstep’s guidance makes the same point: report only the amount paid out.
• Report them as business income on Schedule C, alongside the expenses of the business.
• Work out self-employment tax on Schedule SE: the IRS rate is 15.3% (12.4% Social Security and 2.9% Medicare), due when net earnings from self-employment are $400 or more.
• Pay estimated tax quarterly if you expect to owe enough to need it, since no tax is withheld from payouts.
• Add state income tax where your state levies one.

On Schedule C, ordinary and necessary costs of the business can reduce taxable profit. For a prop trader that plausibly includes evaluation and reset fees, activation and data fees, platform subscriptions and a VPS. Whether a year of mostly failed evaluations counts as a business or a hobby changes what is deductible, and that is exactly the kind of question a tax professional should answer. Keep receipts for every fee.

A non-US trader paid by a US firm is usually asked for a Form W-8BEN to certify foreign status, in place of a W-9. Tax is then generally due in the trader’s country of residence under its own rules.

If HMRC treats your payouts as trading income from self-employment — the point to confirm with an adviser — the £1,000 trading allowance applies, and income above it means registering for Self Assessment by 5 October after the end of the tax year. Other countries have their own rules.

Keep, per year: every payout with date, amount, method and firm; every fee paid; any 1099 or payment-platform statements; exchange rates for payouts received in crypto or foreign currency; and the trader agreement showing your contractor status. How prop firm payouts work covers the methods firms use.

IRS — about Form 1099-NEC

IRS — instructions for Forms 1099-MISC and 1099-NEC

IRS — self-employment tax

IRS — about Schedule C

IRS — estimated taxes

IRS — about Form W-8BEN

IRS — about Form 6781

GOV.UK — trading allowance

Topstep — funded trader tax questions