Introduction and Disclaimers
Since the main focus of my page and YouTube channel is the funded trader evaluation programs, a lot of time I get the question “how am I taxed on profits once I’m funded”. A fair question of course. Luckily it’s pretty straight forward.
Before I get started, the normal disclaimer everyone gives on anything tax and/or futures related. I’m just a random Canadian, I know next to nothing about taxes, and everything below is information to the best of my knowledge but isn’t meant to be advice. Please go find a tax accountant with any specific questions, below is all I’ve got. And it’s just information. Not advice. There’s a quiz at the end. “The information below is _____ and not _____.” (information, advice, are the right answers fyi).
One more disclaimer while I’m at this, this information is specifically related to taxes on funded traders who went through one of the evaluation companies. This is NOT information about day trading taxes in general. You get funded by XYZ Company and withdraw money, this information is for you. You trade your own capital in your own account, this information is NOT for you.
Also (more disclaimers) the information below is based on the companies I have experience with. They are going to be USA based, but fund traders worldwide. I know there are companies in Canada, in the UK, and other places worldwide who fund traders. I have zero idea how they run their business and treat traders from a tax perspective.
If you are interested in trading futures, be sure to check out my Reviews of Funded Futures Trader Evaluations. I update it every day.
Funded Trader Programs Explained (Briefly)
Okay first off, if you stumbled on this article and are wondering what I’m talking about, here’s the gist. There are companies, “proprietary firms” or “prop firms” who will allow traders to trade their capital, and for this there is a profit split. Typically, the trader trades the firms capital and keeps 80% of their profits, the firm keeps 20%.
The benefit to the trader is that they can usually trade a bigger size than they can with their own capital. If you only have $5,000 to your name, you can only do so much trading futures. But if a firm allows you to trade $50,000, well now your game just increased.
The way these firms figure out who is a good trader and who is not is an evaluation phase, usually 2 to 3 weeks. Meet certain goals trading a demo account, don’t break any rules, and you qualify to be funded.
You can read all my reviews and information about these firms here: Funded Trader Evaluations
Finally let’s get to the topic of the article. Luckily, taxes are fairly simple with these programs. I’m going to break it down between USA and not-USA taxes. Not to add more disclaimers, but please do research on how you’ll be taxed in your own country. Sorry residents of Fiji, I have zero idea how you are taxed.
USA Based Residents Taxes (since the firms are typically USA based)
Okay, most of the firms I’m aware of treat funded traders as a 1099 contractor. That’s the cool kid code for an independent contractor. The reason is that you will receive a Form 1099 at the end of the year from the funding company saying “we paid Mr. Trader $X”. That’s it.
You don’t have to factor in capital gains, you don’t have to track every trade. You are paid as if you were a contractor of the company, that’s it. How you report that on your tax return, well I’m no tax expert but basically it’s ordinary business income. If you have expenses related to trading you can deduct them. Software, internet connection, training classes, etc. Reminder: this is information, not advice.
To put it at it’s very basic of basic levels: Year end you’ll receive a 1099 stating how much you withdrew, put it on your tax return as income. Done. (Information, not advice)
Now, that said, sometimes you will find a firm (Earn2Trade is one I’m aware of) who instead of a 1099 contractor will actually treat you as a partner. Your distributions will be taxed differently, and how that is, that information is above my tenuous tax knowledge. I suggest if you want more information on that, research first and ask any questions directly to the company.
Non USA Residents
I mentioned earlier please do your own research on how you’ll be taxed in your own country, and that still holds true. Basically the punch line is would be treated however you would treat if you got paid by a USA company as a contractor. Remember, you are NOT trading your own capital. You are basically working for a company as a trader of their capital, and for that they pay you 80% (or whatever rate). So most likely you won’t be paying capital gains. You don’t have to track every trade. It’s no different than if a US based company hired you as a freelance graphic design contractor and paid you per project. You are a freelance trader.
Also, you won’t get any statement from the company in terms of a tax form. USA companies are obligated to issue 1099’s to USA based contractors, but for people they pay outside the US, they do not. There’s really no reason, the purpose of the 1099 is to inform the IRS, the US tax authority, about transactions and payments to US based contractors who need to pay taxes. The IRS could care less than Mr. Trader in Fiji received $20,000, because the IRS isn’t going to be collecting tax on it.
I should mention at some point in the year you will be asked to provide a form to the company, an IRS form no less, that basically states that you live outside the US, the company doesn’t need to withhold taxes, and you are responsible for paying taxes in your own country. This form actually doesn’t get filed with the IRS, the funding company keeps it on file. That way if they are ever audited, and the IRS says “hey you are paying Mr. Trader why aren’t you filing a 1099?”, the funding company can whip out your form showing you don’t reside in the US and they are not obligated to hold nor report your income. That form is a W8 BEN for most people, but it can vary depending if you operate as a person or business and some other reasons I don’t really know. (Remember, this is information, not advice).
May I first reiterate I’m definitely not a tax expert, and that should be clear by the above. But I do know enough to let you know that when people start talking about capital gains, tracking every trade, what forms will I receive, I can answer the basics. US Based – you’re a 1099 contractor, you’ll receive one after year end. Pay taxes. Outside the US – you’ll receive nothing, and it’s your responsibility to pay taxes on what you made. Tracking shouldn’t be that hard, even if you withdrew every single week, it’s 52 payments, add them up. Pay taxes as ordinary income. Done.
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Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
Hypothetical Performance Disclosure:
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.
You can read more here: Risk Disclosure
The external links on my site and in my video descriptions to trader evaluation companies and software companies are primarily affiliate links. I earn a commission from these companies on any sale made from people visiting these links. That said, I only recommend companies and software I personally use and actually do recommend. Believe me, I turn down a lot of companies who approach me. You can read my full Affiliate Disclosure here.
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