How prop firm payouts are taxed (US)

Why a payout isn't "capital gains"

When you trade your own brokerage account, your profit is usually capital gains. A funded prop account works differently. You don't own the account or the capital — you're trading the firm's simulated or funded account under a contract, and the firm pays you a share of the profit as compensation for hitting its targets. The IRS generally treats that payment as self-employment / nonemployee compensation, not as a capital gain on securities you owned.

That's why most funded traders never see a 1099-B (the brokerage capital-gains form) from their prop firm. Instead they get a 1099-NEC — the form a business issues to an independent contractor it paid $600 or more in a year.

What the 1099-NEC means for you

A 1099-NEC says, in effect, "we paid this person for services." For a funded trader that has two consequences worth understanding:

• It's ordinary income, taxed at your regular income-tax rates — not the often-lower long-term capital-gains rates.
• It's generally subject to [self-employment tax](https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes) — the ~15.3% that covers Social Security and Medicare, on top of income tax, because no employer withheld it for you.

Both points are why funded income can feel like it's taxed more heavily than a beginner expects. Nothing is being done to you — it's just that contractor income carries the employer and employee side of payroll taxes.

The offshore-firm reconstruction problem

Many prop firms are based outside the US and issue no US tax form at all. That does not make the income untaxable — it means the record-keeping falls on you. Traders in this position typically reconstruct their income by hand from payout confirmations, dashboard exports, and bank deposits.

This is exactly the friction the TradersGuild Eval Ledger is built to remove: its Tax Season Export produces a tax-year summary of payouts received and eval fees paid that you can hand to a CPA — a bookkeeping record, not a tax calculation.

Payouts received vs. what you spent

Good bookkeeping separates two things all year:

• Payouts received — every withdrawal the firm actually paid you, by date.
• What you spent to trade — evaluation fees, resets, data feeds, platform costs. These are the numbers a CPA looks at when deciding what, if anything, is a business expense. (We cover that in Are eval fees a business expense? — and the short version is: it's a CPA question, not a given.)

Keeping those two columns clean all year is 90% of what makes tax season painless. You don't need to know the tax treatment in January — you need the record.

The questions to take to a CPA

• Should this income go on a [Schedule C](https://www.irs.gov/forms-pubs/about-schedule-c-form-1040) as a sole-proprietor business, or somewhere else for your situation?
• Do you owe [quarterly estimated taxes](/propguard/learn/taxes/quarterly-estimated-taxes-funded-traders) on it this year?
• For an offshore firm that issued nothing, how does your CPA want the income substantiated?

A trader-focused CPA — the kind of specialist behind resources like Green Trader Tax — answers these in an afternoon. That's the right place for the specifics.