Prop Trading Tax and Legal Changes in 2026: A Global Regulatory Overview
Dr. Algo
Prop Deal Intelligence Hub
New tax guidance and legal developments in the US, UK, EU, and Australia are reshaping how prop trading profits are taxed and how funded traders should structure their activities.
Prop Trading Tax and Legal Changes in 2026: A Global Regulatory Overview
The regulatory and tax environment for prop trading has shifted meaningfully in the first quarter of 2026. From IRS guidance on the treatment of prop firm evaluation fees to FCA compliance directives in the UK, traders and firms alike face a more complex legal landscape than existed even 12 months ago. At Ask Propfirm, we track these regulatory developments so funded traders stay informed and compliant.
This analysis covers the key developments across four major jurisdictions.
United States: IRS and CFTC Developments
IRS Guidance on Challenge Fee Deductibility (January 2026)
The US Internal Revenue Service published a technical memorandum in January 2026 clarifying the treatment of prop firm evaluation fees for tax purposes. Key determinations:
Challenge fees are deductible as business expenses for traders who meet the IRS's definition of a trader in securities or commodities — that is, those who trade frequently, seek short-term profits, and devote substantial time to trading activity.
However, the IRS memorandum introduces an important caveat:
"Evaluation fees paid to prop trading firms are deductible only in the tax year in which the evaluation is attempted, regardless of whether the taxpayer subsequently receives funded trading status."
This clarifies a grey area: previously, some tax professionals argued that failed evaluation fees were personal losses (not deductible), while successful evaluation fees represented the cost basis of the funded account. The new guidance treats all evaluation fees as current-year business expenses.
Practical impact: Traders who paid $5,000 in multiple failed evaluations in 2026 can deduct the full $5,000 as a business expense — provided they can establish trader status under IRS criteria.
Funded Account Profit Classification
The IRS memorandum also addresses the treatment of prop firm payouts:
- Payouts from forex prop firms: Treated as ordinary income (subject to self-employment tax if received as independent contractor income)
- Payouts from CME futures prop firms: Subject to Section 1256 treatment — 60% long-term capital gains / 40% short-term capital gains regardless of holding period (the "60/40 rule")
This confirms the existing tax advantage of CME futures trading for US-based traders and strengthens the case for futures-based prop programs from a pure tax efficiency perspective. See our futures prop firm directory for compliant CME-based options, including Apex Trader Funding and Topstep.
CFTC Proposed Rulemaking on Retail Forex Prop Firms
The CFTC published an Advance Notice of Proposed Rulemaking (ANPRM) in March 2026 on retail forex prop firms. The notice seeks comment on whether prop firms should be required to:
- Register as Introducing Brokers or Retail Foreign Exchange Dealers
- Maintain minimum capital reserves proportional to total funded account balances
- Submit to CFTC examination of payout practices
The comment period runs through June 2026. Final rules, if adopted, would likely take effect in 2027.
United Kingdom: FCA CP26/7 Implications
As covered separately in our FCA regulatory analysis, the UK's FCA has issued Consultation Paper CP26/7. Key tax and legal implications for UK-based funded traders:
National Insurance on prop trading profits: HMRC (the UK tax authority) has confirmed that funded trader payouts received as a self-employed individual are subject to Class 4 National Insurance contributions (9% on profits between £12,570 and £50,270; 2% above).
VAT on challenge fees: HMRC guidance published in February 2026 confirms that challenge fees paid to UK-registered prop firms are subject to 20% UK VAT. For firms registered outside the UK, VAT treatment depends on the firm's jurisdiction and the trader's VAT registration status.
Practical implication: UK traders paying challenge fees to UK-registered firms should ensure VAT receipts are obtained for potential reclaim if they are VAT-registered businesses.
European Union: ESMA Activity
The European Securities and Markets Authority (ESMA) published a Risk Warning Opinion on proprietary trading products in February 2026. While not binding regulation, the opinion:
- Identifies prop firm evaluation models as potentially meeting the definition of "complex financial products" requiring disclosure obligations under MiFID II
- Calls on national regulators (BaFin, AMF, etc.) to investigate whether prop firms marketing to EU residents should be registered under the Alternative Investment Fund Managers Directive (AIFMD)
The German BaFin responded in March 2026 by issuing guidance that prop firms marketing evaluation products in Germany must file a notification under financial promotions rules — affecting firms that run German-language advertising campaigns.
For traders: No direct tax changes for EU traders yet, but increased regulatory scrutiny may lead to higher compliance costs that indirectly affect firm pricing.
Australia: ASIC Review
Australia's ASIC (Australian Securities and Investments Commission) published an information request in March 2026, seeking data from prop firms marketing to Australian traders. ASIC is investigating whether:
- Prop firm challenge fees constitute "financial products" under the Corporations Act 2001
- Prop firms require an Australian Financial Services Licence (AFSL) to operate in Australia
The review is preliminary. No regulatory action has been taken.
Tax note for Australian traders: The ATO (Australian Taxation Office) has not issued specific guidance on prop trading, but existing tax law treats funded trading profits as assessable income for Australian tax residents.
Practical Guidance for Global Prop Traders: 2026 Tax Checklist
| Action | US Traders | UK Traders | EU Traders | Australian Traders |
|---|---|---|---|---|
| Establish trader status documentation | Critical | Recommended | Recommended | Recommended |
| Deduct challenge fees | Yes — current year | Yes — business expense | Varies by country | Yes — assessable expense |
| Apply 60/40 to futures | Yes — Section 1256 | No — UK rules differ | No | No |
| Track payout receipts | Yes | Yes + VAT | Yes | Yes |
| Consider LLC/Ltd company structure | Beneficial for high earners | Beneficial | Beneficial | Consult accountant |
Dr. Algo's Assessment
The 2026 regulatory wave is arriving faster than most traders anticipated. The most immediately actionable change is the US IRS clarification on challenge fee deductibility — US traders who have not been deducting evaluation fees on their tax returns may be leaving money on the table.
The longer-term implication is structural: the global regulatory direction is toward treating prop trading as a financial service activity with corresponding obligations. Traders who treat their funded trading as a serious business — maintaining proper records, separating business and personal finances, and consulting qualified tax professionals — will be better positioned for both tax efficiency and any future compliance requirements.
Consult our Legal and Tax Resources Hub for jurisdiction-specific information. For firms with the strongest compliance infrastructure, explore our FTMO review — whose OANDA partnership provides the most transparent regulated structure available. Visit the official FTMO website for its current compliance documentation.