Prop Firm Structure and Earnings Tax Treatment

Discussion in 'Prop Firms' started by HoustonTrader, Nov 26, 2002.

  1. If you are working for one of the prop firms trading FUTURES, are you an employee of the firm and all earnings are taxed as ordinary income, or is there some type of LLC setup where earnings carry through and you are able to take advantage of the 60/40 cap gains to ordinary tax treatment? Also, are traders responsible for the self employment matching tax deductions for medicare and OASDI?

    Basically I'm clueless as to how most of the firms set up their employee/employer relationships and how these affect the traders taxes.

    I would appreciate it if traders from different firms could chime in with any info. Especially looking for how Schony structures this.

    Thanks
     
  2. Does what I'm asking not make sense? Stupid question? No one understands taxes?

    I need help. I'm an institutional trader and I have no experience with these tax issues.
     
  3. DaveN

    DaveN

    I'd guess that of the many prop traders that frequent these boards, the vast majority are not trading futures through their prop firm. Of that few, probably a small fraction are Schony prop futures traders.

    I understand the question you are asking, but I have only guesses about the tax treatment. It's a tough question.

    Perhaps floating the question directly with Schony (if that's possible). One of the specialized trader tax services may have experience with this as well.
     
  4. cashonly

    cashonly Bright Trading, LLC

    I know that different firms do things differently. You should check with someone at your firm and if they can't answer you, they should be able to direct you to a professional who can.
     
  5. I'm pretty sure that you'll find that as a member of a trading llc, that your income is classified as "distribution of partnership income" and shows up on a K-1 as ordinary income. Since this is your profession, you are probably not subject to any special treatment (as longer term investors may be). Click to Robert Green, CPA, he is pretty knowledgeable about such matters ...

    (disclaimer: Mr. Green is not BT's accountant nor my personal tax preparer - I suggest him based on my experience speaking with him).

    Don Bright
     
  6. I just asked the same question today to Echotrade. Now that they have added futures will I be taxed as ordinary income :mad:
     
  7. Taxes aren't my speciality. so check everything below with a CPA first

    First the pro firms are all set up as LLC's. We recieve a K-1 at the end of the year. It refects the totals in your trading account that you did. This needs to be placed on one line on a 1040. A lot of the firms will allow you to claim your expenses for the year which they will take out of your account so your expenses are pre tax dollars. Self employment taxes aren' t required to my knowledge, nor is Social Security taken out.

    On your question I'm sure it is the same way with futures. It should be taxed as a partnership income.

    Robert