How do prop firms tend to handle taxation?

Discussion in 'Prop Firms' started by Chagi, Dec 9, 2005.

  1. Chagi



    I'm from Canada, and I realize that traders from other countries will have some answers that are not necessarily applicable for me, but how do prop firms tend to handle taxation? The specific arrangement would likely consist of me putting up some funds, with the prop firm providing leverage on those funds (I have seen posters on this forum opinion that this is not a "true" prop arrangement).

    The reason I ask is that I'm giving careful consideration to some form of remote prop trading vs. trading with my own capital. I'm thinking about going the prop route once I am finished university because, quite frankly, I am undercapitalized.

    I ask the taxation question because I would like to better understand the relationship between a prop firm and the trader. I am starting to look into this, and would like some background on how the arrangement tends to work. Am I considered some sort of "employee" or consultant for the firm, with the firm withholding taxes? Or is a prop trader solely responsible for the tax issue?


    P.S. Any suggestions about the prop route would be greatly appreciated. :)
  2. They pass all the taxes on to you. Thats why if your profitable, you are better off incorporating your own company that they can send cheques too. Get an accountant though.
  3. Most US prop firms give you a form called a K-1 at the end of the year, which shows your P/L. This is if the firm is organized as a partnership, with you as a certain class partner, which is a common arrangement.

    I spent some bucks to have a high priced accountant read my prop agreement and determine that I only have to declare the money I withdraw from my account as a disbursment or dividend from the partnership. Not treated favorably as a divdend from a canadian partnership would be, you'd just file a business return with that amount as your revenue. However you can use it to defer taxes due.

    At least that's how I did it the last two years.

    Some firms may treat you as a customer and issue a 1099 instead of a K-1. I'm not familiar with that, so can't help you there. I'm talking about American firms here.
  4. bonds


    To those who have incorporated themseves, what kind of things do you write off? What kind of salary do you pay yourself?
    Is there somewhere I can find more information about this?

  5. I had a high price accountant check out that stuff too and she told me you can't file as a business receiving the income since a corporation cannot be a member of an LLC. Since it's you receiving the income you have to declare it as ordinary income. How did you get around this?
    When we were getting 1099's then we could declare the money as we pulled it out, but with this K-1 she told me we can't. Don't tell me I wasted my money...But the clear message was to be a partner in an LLC, you gotta be a person and not a corporation.

  6. jrsteine


    FYI: I tried to organize my own LLC as a "member" of my prop firm's LLC. The firm told me they will only pay an individual - not an LLC or corporation. Therefore, I cannot receive any of the tax benefits associated with these entities (such as a 401K pension or SEP IRA). I'm sure there was a legitimate reason and that this blanket denial wasn't arbitrary. You may wish to ask your firm whether they'll even entertain the possibility before you spend too much time structuring your company.
  7. I didn't say I was incorporated. I meant a T-2124, which is a business return filed as part of your personal tax return. This is where you itemize all your deductible expenses, depreciation of capital equipment, etc against your revenues (trading profits).

    The funds you withdraw from your account are what you declare as your revenues. If you made more than you withdrew, you ignore than and defer that income to a future date.

  8. Well i have visited a couple of firm and iknow there are 2 different kind of k-1
    in once you pay social security and fed tax
    in the other i know u ony have to pay the federal tax
    but i guess have to find out exactly what kind of a k-1 are these prop firms offering as they have their own pay ot and all