Proptrading and taxes – how to settle profits from funded accounts?

Proptrading and taxes, or more questions than answers? Not necessarily. However, this is certainly another proof that legal regulations (especially tax regulations) do not keep up with progress in the financial market. A few years ago, when I first tried to settle profits from proptrader activities, I came across a lot of question marks and no idea how to do it correctly. The problem usually lies in determining what prop-trading activity actually is and why, in the event of making profits, we should calculate the amount of tax. In this short article, I want to present you a few issues related to this topic that may make this obligation easier.

What is proptrading?

In order to fully determine the legal relationship between the trading company and the trader, it is necessary to consider the relationship between both parties. Proptrading is a model of cooperation between a trader and a prop company in which the trader, most often after undergoing the so-called challenges (there are also models without challenges), receives access to the trading infrastructure and investment account. When a positive result is generated, the trader can pay out his reward (divide the profit between both parties in previously agreed proportions), which he must necessarily settle in the next year.

For talented traders, but also beginners, an adventure with a trading company can guarantee:

• large capital to trade for a small initial fee, which is refunded after successfully completing the challenge,
• education: a risk framework that forces responsible trading,
• opportunity to build a career and earn anywhere and anytime.

There are definitely more pros and cons of trading in proptrading, but this is not what we will focus on here. Let's imagine a scenario where we have passed the challenge, have a trading account and have withdrawn profits from it. Then the question arises: how to settle this with the tax office?

How to settle proptrading tax?

Under Polish law, there is no regulation that would directly refer to prop-trading activities. Usually, in decent prop trading companies, after successfully completing the challenge, the trader receives an agreement that regulates the commission remuneration (based on a positive result on the account) and the legal relationship between him and the prop. There are not many interpretations related to this activity, but if there are, they indicate that this contract is closest to mandate contracts. Pursuant to Art. 734 of the Civil Code (CC), through a mandate contract, the person accepting the order (trader) undertakes to perform a specific legal act for the ordering party (proprietary company). IN interpretation of December 14, 2022. we read:

“As a result, the proptrader's share in the profits of the proptrading company should be treated as remuneration from the order, but determined not as a lump sum, but on a commission basis (Article 10(1)(2) and Article 13(8) of the Act of July 26.07.1991, 41 on tax income from natural persons - hereinafter referred to as "updof"). The proptrading company should charge this remuneration with an advance tax, and finally settle proptrade in the annual return (Article 1(XNUMX) of the Updof).”

Problem with “advance charge” In principle, one may be created. Typically, proptradigm companies operate internationally. In their contracts and regulations, they often exclude liability related to any tax settlements, indicating that this obligation rests entirely with the trader. Therefore, income tax advances are not paid, a the need to settle income tax rests entirely with the trader. If the proptrading company paid advances on income tax, the trader would only have to submit an annual return (receives PIT-11).

In fact, we still focus on the situation in which the trader does not run a business. Revenues obtained by a trader are revenues obtained from activities performed personally (Article 10(1)(2) of the Personal Income Tax Act). The conclusion is that, in accordance with the previous article of the PIT Act, income from activities performed personally includes revenues from the provision of services under a contract of mandate or a contract for specific work. It is very important that in the case of cooperation between an individual and a foreign (proptradig) company the trader should pay advance income tax on his own. Pursuant to Art. 44 section 1a point 3 of the PIT Act, the obligation to pay advances independently (by the 20th day of each month) is imposed on natural persons receiving funds from abroad and, importantly,  without the intermediation of payers. We are, of course, talking about income obtained from activities carried out personally.

Proptrading and taxes – what rate?

In the case of a natural person, advance payments due on profits should be taxed using the tax scale (12% up to PLN 120 and 000% above this amount). They have to be paid when you achieve profits in the previous month. The basis for calculating the due advance payment is usually an invoice issued by us (usually via dedicated websites) for the proptrading company. If a proptrader runs a business, the services involving the execution of such an order will be taxed as part of this activity, using the selected form of taxation.

Podsumowując:

• without running a business, the trader is obliged to: upon payment of profit in the following month, by the 20th day, pay an advance payment of income tax according to the tax scale + settle the accounts in the annual return; the relationship between us and the proptradignation company is most similar to a mandate contract;
• in the case of using a Polish proptradignation company, the company is obliged to make advance payments;
• when we run a business, we settle our accounts using the selected form of taxation;
• in the case of a challenge fee (we assume that it is not refunded), it can be included in the costs - it is a tax-deductible cost. Without a fee, we basically cannot make a call, which means we cannot generate profits.

CHECK: Forex Club Tax 9 now available! Settle transactions from a foreign broker

Requesting an individual interpretation

If you have any doubts as to what the profit settlement should look like in your case with the proptrading company you have chosen, the safest solution is to apply to the National Tax Information for individual tax interpretation. The application can be submitted, among others: online and its cost is PLN 40. The waiting time for interpretation may be up to 3 months.