If you’re a prop trader operating under a funded account model, you might be familiar with the rush of payouts—but what happens when you end the year in the red? Can losses be claimed back through tax refunds? And if so, how?

As prop trading becomes more widespread across the UK, EU, and US, traders are starting to ask serious questions about tax liabilities and rights. The reality is: just because you lost the trade doesn't mean you should lose the refund.

1. UK: Self-Employed or Not? In the UK, if you trade under a funded challenge and are classified as self-employed, you may be eligible to declare trading losses against your total income. However, many prop firms pay as 'contractors' or even via international entities, which makes things tricky. HMRC rules often don’t treat prop trading the same way as traditional business activity, so it's essential to seek advice from a tax advisor who understands how funded accounts operate.

2. US: Are You a Trader in Securities? In the US, the IRS has a strict definition of a "Trader in Securities." If you qualify, you can elect Mark-to-Market (MTM) accounting, allowing you to deduct losses as ordinary losses rather than capital losses—potentially unlocking major tax refunds. But this election must be made in advance (by April 15 of the tax year), and not all prop traders qualify.

3. EU: Country-Specific Complexities Across the EU, each member state handles trading income differently. For instance, in Germany, private trading profits are taxed under a separate regime, while in countries like the Netherlands or Spain, trading via foreign-funded accounts may escape taxation altogether unless converted into fiat. In most cases, prop traders are in a grey zone—not fully recognized as self-employed, but also not considered retail investors.

Key Takeaways for Funded Traders:

• Keep detailed records of all trading activity, including payouts and losses.
• Understand your classification: investor, contractor, or self-employed.
• Consider professional tax advice tailored to your country’s laws.
• Don’t assume losses can't be deducted—they often can, with the right structure.

The takeaway? Don’t let tax confusion become another trading loss. In the evolving world of prop trading, understanding your tax obligations and opportunities is as important as mastering your strategy.

Stay tuned to PropInsider for more insights into the financial and legal side of funded trading.