The Prop Firm Textbook EP14 | Taxes and Tax Returns [The Proper Way to Handle Prop Firm Rewards]

※ This article is intended to provide general information and is not tax advice. Please consult a tax accountant for details.

Shinshokun

Professor Kaitai! I’m starting to make profits from the prop firm, but what should I do about taxes? I heard that I don’t need to file a tax return since it’s an overseas company… is that not the case?

Professor Kaitai

That’s a big misunderstanding. The rewards you receive from overseas prop firms are also taxable under Japanese tax law. In fact, if you don’t file a tax return properly, it could lead to serious trouble later on.

As your earnings from prop firms increase, the issue of “taxes” is something you will inevitably face. Especially if you’re using an overseas prop firm, many people feel uncertain about how to file a tax return and handle expenses.

In fact, did you know that the examination fees can be deducted in full as expenses, including failures? Even if you fail the challenge three times, all those costs can be considered tax-deductible expenses. This article will explain the proper tax treatment of prop firm rewards in an easy-to-understand way for beginners.

In the previous article, “The Prop Firm Textbook (Comprehensive Guide),” we discussed the withdrawal process, but this time we’ll focus on tax treatment.

Tax Classification of Prop Firm Rewards | Reporting as Miscellaneous Income

Shinshokun

Is the money I receive from a prop firm different from a salary?

Professor Kaitai

Yes, it’s treated as “miscellaneous income” rather than employment income. That’s an important point.

The rewards you receive from a prop firm are generally reported as miscellaneous income. It’s a different income category than employment income or business income, so it’s important to understand this correctly.

What is Miscellaneous Income?

Miscellaneous income refers to income that does not fall under any other income category, such as employment income, business income, or real estate income. It has the following characteristics:

• Subject to comprehensive taxation: The tax rate is determined by combining with other income
• Cannot be offset against losses: Miscellaneous income losses cannot be offset against other income
• No special deduction for blue tax returns: There are no deductions like those for business income
• Deductible expenses: Necessary expenses to earn the income can be deducted

Difference from Domestic FX

Transactions with domestic FX brokers are reported as “miscellaneous income, etc. from futures trading” and subject to separate taxation (a flat rate of 20.315%), but prop firm rewards are miscellaneous income subject to comprehensive taxation. This means the tax rate varies depending on the total amount of your income.

Reporting as Business Income in Some Cases

If you are a full-time prop trader and meet the following conditions, you may be able to report your income as business income:

• Conducting transactions continuously and repeatedly
• Investing a considerable amount of time and effort
• Having a profit-making and paid nature
• Having social objectivity as a business

Professor Kaitai

If your income is recognized as business income, you can also use the special deduction for blue tax returns, but the tax office’s judgment is required, so I recommend consulting a tax accountant in advance.

Cases Where Tax Returns Are Required | The 200,000 Yen Side Income Rule

Shinshokun

I heard that if your annual side income is less than 200,000 yen, you don’t need to file a tax return. Is that true?

Professor Kaitai

You don’t need to file an income tax return, but you still need to file a residential tax return separately. If you miss this, it can cause problems later.

Whether a tax return is required depends on your employment status and income amount. Please check your case in the table below.

Correct Understanding of the 200,000 Yen Side Income Rule

The “200,000 yen side income rule” means that if an employee’s side income is 200,000 yen or less per year, an income tax return is not required. However, the following points need to be noted:

• Residential tax return is still required: You must file a return with the municipal government, even if the income is 200,000 yen or less
• It’s “income,” not “revenue:” The judgment is based on the amount after deducting expenses
• If filing a tax return for medical expense deductions, etc.: You need to report all income, even if it’s 200,000 yen or less

Shinshokun

So, if the revenue is 300,000 yen but there are 150,000 yen in expenses, the income is 150,000 yen, so I don’t need to file a tax return, right?

Professor Kaitai

That’s exactly right! That’s why it’s important to keep careful records of your expenses. Let’s take a closer look at this in the next section.

For Full-time Traders

If you are a full-time prop trader, you will need to file a tax return if your income exceeds the basic deduction (480,000 yen). However, even if your income is within the basic deduction, it is recommended to file a tax return for the following reasons:

• Income certification may be required in some cases (rental contracts, loan applications, etc.)
• You may be eligible for reductions in national health insurance premiums
• It’s useful for future transition to business income

List of Deductible Expenses

Expenses incurred to earn income from prop firms can be deducted as expenses. Particularly important is the fact that all examination fees, including failures, can be deducted as expenses.

Shinshokun

If I failed the challenge 3 times and then passed on the 4th try, does that mean all 4 attempts can be claimed as expenses?!

Professor Kaitai

Exactly right! Even the failures are considered “necessary expenses to earn the income,” so the full amount can be deducted as an expense. Many people don’t know this.