Prop Trading Taxation

C

chinook

Hi all,

I was approached by a headhunter regarding the possibility of trading (futures) for a prop firm using their capital. She says they pay 50% of the profit. I wonder how the taxation works in this case.

Let's say we are profitable... If the firm pays capital gains tax and then pays out 50% of the profits to me, then I have to pay personal income tax on that too. Will it possible for me to pay straight capital gains tax on the 50% of the profits and avoid double taxation?

Best.
 
What they mean is that (depending on the legal structure of your relationship with the prop shop) WORST CASE:
Self-employment tax 15.3%
Federal income tax 35%
State income tax ?%
total taxes, roughly 50%

The above is the "subcontractor approach" that many prop shops use. They will issue you a 1099-MISC at the end of the year for your net take home amount.


>>Will it possible for me to pay straight capital gains tax on the profits ?

Yes, it is possible, but generally not if the prop shop issues a 1099-MISC. Rather they need to issue a K-1
 
Thanks!

I thought about this little bit more. Let's say for $100 total trading profits, they would show $50 expense which would be sent to me. They would pay capital taxes for $50 gain and I would pay income tax for my general income of $50.
 
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