5 Things to Know About Prop Firm Payouts

If you’re trading in a funded account, especially through a prop firm, you might be wondering, “Do I owe taxes on the profits I make?” As a CPA, I get this question all the time, and the answer depends on the structure of the funding arrangement and how you’re compensated.

What Is a Funded Trading Account?

Funded trading accounts are typically offered by proprietary (prop) trading firms that allow you to trade using the firm’s capital after you pass an evaluation. You’re not trading your own money but rather earning a cut of the profits. The appeal is obvious. There’s less personal financial risk, the ability to scale, and the opportunity to focus purely on trading without worrying about blowing your own account. However, just because it’s not your capital doesn’t mean it’s not your income.

You Still Owe Taxes for Prop Firm Payouts And Here’s Why

Even though you’re not using your own money, the income you receive from profit splits or performance bonuses is still considered taxable income. The IRS doesn’t care whose capital is used to generate the income. They care that you received money as a result of trading. This income is treated just like any other self-employment or contractor-based earnings. Whether you’re taking home 70% of a $10,000 monthly payout or collecting smaller distributions, that money is taxable the moment it hits your account.

Independent Contractor Status

Most prop firms don’t hire traders as employees. Instead, you’re classified as an independent contractor or sometimes even a partner in a profit-sharing arrangement. In either case, the income you receive (often reported on a 1099-NEC or not reported at all) must still be included on your tax return. A lot of firms don’t issue any formal tax forms, so it’s on you to track what you earned. Prop firms don’t really spell this out, and a lot of traders are caught off guard when they realize they’re technically running a business in the eyes of the IRS. That means more responsibility, but also potential deductions if done right.

How It’s Reported

The money you make from funded accounts is generally treated as self-employment income, and it’s reportable on Schedule C if you’re a sole proprietor or single-member LLC. You may also be subject to self-employment taxes, which include Social Security and Medicare contributions on top of your regular federal and state taxes.

What About Deductions?

As an independent contractor, you may be able to deduct trading-related expenses such as trading software or platform subscriptions, internet and phone service, educational courses or coaching, and even office equipment or part of your home office. Just make sure these are ordinary and necessary in the context of your trading activity. If you’re unsure, that’s when it’s smart to reach out to a CPA like me to review what qualifies and what doesn’t.

Tip: Keep Good Records

Many funded traders overlook this, but accurate bookkeeping is key. Track every payout you receive from the prop firm and set aside funds for tax season. I’ve seen traders get caught off guard with large tax bills simply because they didn’t realize they were responsible for paying self-employment taxes. Also, if your payouts are consistent or significant, consider making estimated quarterly tax payments to avoid underpayment penalties. If your strategy includes scaling up with multiple prop firms or trading accounts, it becomes even more important to stay organized. You don’t want to be piecing things together months later when it’s time to file, especially if you get audited.

Final Thoughts

Yes, you absolutely owe taxes on income from funded trading accounts and prop firm payouts. While the trading capital isn’t yours, the earnings are and that makes them taxable. To stay compliant and avoid surprises, treat your trading like a business. That means tracking income, saving for taxes, and knowing what you can and can’t deduct.