U.S. Futures Taxation: Key Differences Between Personal Brokers and Prop Firms

This analysis is based on a Reddit discussion [4] dated December 5, 2025, where a U.S. futures trader (first-year trading) asked if futures gains are taxed without withdrawals, hoping to avoid a tax consultant initially. Key findings include:

1. Personal Brokerage Futures (Section 1256 Contracts)
   : Gains are taxable upon position closure and at year-end via mark-to-market (MTM) rules, regardless of withdrawal status [1]. These contracts benefit from the 60/40 tax rule, where 60% of gains are treated as long-term capital gains and 40% as short-term (with favorable tax rates) [1]. The wash sale rule does not apply to futures [0].
2. Trader Tax Status (TTS)
   : TTS is required to deduct trading-related expenses (e.g., internet, PC). Eligibility criteria include: substantial volume (minimum 4 trades/day, 15/week, 60/month, 720/year per Poppe court [3]), trading on 75% of available days, and average holding period under 31 days (Endicott court [2]). TTS is determined by facts and circumstances, not formal election [0].
3. Prop Firm Futures
   : A Reddit claim suggests prop firm gains are taxed only on withdrawal, but formal sources (including IRS guidelines) do not clearly confirm this [0]. Tax treatment may depend on the firm’s structure, constructive receipt rules, and whether traders have a beneficial interest in gains before withdrawal [0].
4. Reliability of Advice
   : Users emphasized Reddit is an unreliable source for tax advice; professional consultation is recommended to navigate complex tax laws [4].

1. Personal brokerage futures face stricter taxation timelines (closure and year-end MTM) compared to ambiguous prop firm rules, highlighting the need for firm-specific clarification.
2. TTS eligibility relies on judicial benchmarks (Poppe/Endicott courts) rather than informal rules, making qualification a high-bar process.
3. The 60/40 tax rule offers meaningful tax advantages for futures traders, a critical benefit not universal to other investment vehicles [1].
4. Misinformation on platforms like Reddit underscores the risk of self-filing without verifying rules against official IRS resources.

• Risks
  : Incorrectly assuming no tax liability until withdrawal in personal accounts could lead to underpayment penalties [0]. Misapplying TTS criteria may result in disallowed expense deductions [0]. Reliance on Reddit advice increases the likelihood of non-compliance [4].
• Opportunities
  : The 60/40 tax rule allows for lower effective tax rates on futures gains compared to short-term stock gains [1]. Proper TTS qualification can reduce taxable income by deducting trading expenses [0].

• Personal U.S. brokerage futures (Section 1256) are taxed on closed gains and year-end MTM, with 60/40 tax treatment and no wash sale rule [1].
• TTS requires meeting strict volume, frequency, and holding period criteria to deduct trading expenses [2][3].
• Prop firm futures taxation remains unconfirmed by formal sources; tax liability may depend on firm structure and constructive receipt [0].
• Professional tax consultation is recommended over Reddit advice to ensure compliance and maximize benefits.