Don’t Miss These 3 Main Disadvantages of Prop Trading Firms

Alternative: stay non-pro and keep 100%.

Potential savings per $10,000 in profit: $1,000-4,000

How are my profits taxed?

When trading through a prop firm you’re an independent contractor or partner in a pass-through entity like an LLC. Consequently, your profits will be taxed at your personal income tax rate instead of a potentially much lower capital gains tax rate.

Capital gains vs. personal income tax

Personal income tax rates vary greatly across the world and the same is true for short- and long-term capital gains tax rates. So please do yourself a big favor and compare the applicable rates in your country to make an educated decision.

The paradox here is that taking the prop trading route for the purpose of increasing the income potential only makes sense if traders are willing to escape the progressive tax rates for higher incomes in their home country.

Alternative: stay non-pro and pay applicable capital gains tax (zero for profits from the sale of securities if you’re lucky enough to trade from Cyprus or Singapore etc.).

Potential savings per $10,000 in profit: depends on the difference between personal income and capital gains tax in your country.

Capital losses vs. nada

In addition to the profit share, you need to be aware of the fact that offshore prop trading firms “own” your capital losses. I know, nobody wants to talk about losses, but you have to account for all possible scenarios.

Alternative: stay non-pro and carry those unfortunate capital losses forward or backward to other tax years.

Potential savings: depends on how unfortunate your trading year was.

Disadvantages of prop trading – Conclusion

The disadvantages clearly seem to outweigh the few benefits left over in the current remote prop trading business model.

So stay non-pro and treat yourself to a nice vacation with the substantial savings, compound your winnings to make even more money next year or head straight for a tax haven with sandy beaches and palm trees while keeping a big chunk of your profits!

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