The business side of trading, explained for the US.
Plain-language guides for US traders who run their trading as a business: how prop firm payouts are usually taxed, what can count as an expense, and how your state changes the picture. Every section links to the official IRS or state source.
Pivotext guides are general information about how US federal and state tax rules commonly apply to traders. They are not tax, accounting or legal advice, and they may not fit your situation. Rules change, sometimes every year. Confirm anything you rely on with a qualified tax professional such as a CPA or enrolled agent.
Federal rules: the same in every state
The IRS sets the rules that apply everywhere in the US. Your state then decides how it taxes the same income, and not every state follows the federal rules exactly.
How prop firm payouts are usually taxed
US prop firms commonly report payouts to traders on Form 1099-NEC as nonemployee compensation. That usually means you report the income and your business expenses on Schedule C, and pay self-employment tax (15.3% for Social Security and Medicare) on your net profit, on top of income tax. Your net profit may also qualify for the qualified business income deduction of up to 20%, which was made permanent in 2025.
Sources: Form 1099-NEC · Schedule C · Self-employment tax · QBI deduction
What can count as a business expense
A cost is generally deductible if it's both ordinary and necessary for your trading business. Costs traders commonly ask about:
- Evaluations, resets and activation fees
- Data feeds, platform and charting subscriptions
- Software, computers and monitors
- The business share of internet and phone
- A home office used regularly and exclusively for the business
- Education that maintains or improves skills for your existing business
- Accounting and professional fees
Source: IRS: Deducting business expenses
Equipment
Items costing $2,500 or less can often be expensed right away under the de minimis safe harbor election. Larger equipment can be expensed with Section 179 (limit $2.5 million from 2025) or 100% bonus depreciation, which is permanent for property acquired and placed in service after January 19, 2025. Several states don't follow these rules.
Home office
The space must be used regularly and exclusively for your business. The simplified method allows $5 per square foot for up to 300 square feet, a maximum of $1,500 a year. The regular method uses your actual home costs and the office's share of your home.
Source: IRS: Home office deduction
Estimated taxes
No one withholds tax from prop firm payouts, so self-employed traders generally pay estimated tax four times a year, usually due April 15, June 15, September 15 and January 15 of the following year. Missing them can mean an underpayment penalty.
Source: IRS: Estimated taxes
Records to keep
Keep receipts, invoices, payout confirmations and bank statements that support every income and expense line. The IRS generally expects records to be kept at least three years after you file, and longer for equipment and other property.
Source: IRS: Recordkeeping
Choose your state
Pick your state to see how it taxes a trader's business income, the rules that differ from the federal ones, and a link to its official tax agency.
Federal rules above still apply in every state. Where you live, and where you do your trading, usually decide which state can tax your income. If you moved during the year or trade from more than one state, ask your tax professional.