Dear ATO, I am a sole trader and I have 3 sources of income:
- Website consulting (currently this is the biggest portion of my income, but I am planning to become a full time trader in a few months time and stop offering website services).
My other 2 sources of income (once I became a full time trader, these are the 2 types of business activities that will make up my income):
- Forex trading (with brokers like IC Markets).
- Forex proprietary trading (Provide services as a contractor for educational purposes within the forex industry by participating in a simulated trading program offered by proprietary trading firms such as FTMO).
I couldn't find any information about income tax and deductions related to Prop Firm trading specifically. Prop firm trading has been around for years, however there's a lack of information (tax-related) on this, possibly because it's not very popular yet in Australia.
With forex prop firm trading companies like FTMO [Removed by moderator], there is a "challenge" fee I pay initially. If I passed the challenge, i receive a simulated trading account for me to trade and earn income, but if I failed the challenge, I lose the fee I paid. Given that I am a sole trader, are these failed challenges fees I paid tax deductible? I would assume yes because these fees are paid purely to generate income / increase income. Example scenario:
- I paid for 5 challenges ($1,000 each) total 5k
- I failed 4 challenges and passed 1 challenge.
- From the 1 challenge that I passed, I earned $5k from trading the simulated account from the prop firm.
- Question 1: For the 4 challenges which I paid and I failed, are these tax deductible for me as a sole trader? I would assume yes, since these fees were paid purely to generate income / increase income. Just like how the 5k profit I receive will count towards my income, but this wouldn't have been possible if I hadn't paid the initial challenge fee in the first place.
Another thing I'm not sure about:
Some prop firm trading companies refund the challenge fee if the customer managed to earn profit after passing the challenge, while other prop firms do not regardless of passing the challenge or not. Example scenario:
- I paid for 2 challenges from 2 different prop firm trading companies (1 challenge from FTMO with $1,000 challenge fee, 1 challenge from Alpha Capital with $1,000 challenge fee)
- FTMO refunds the challenge fee upon reaching the payout stage, while Alpha Capital does not. Suppose I successfully passed both challenges and made a profit of 2k from both FTMO and Alpha Capital. This means when I received the payout from FTMO, they would add the $1,000 challenge fee on top of the profit to my payout. From FTMO, I would receive 3k in total (2k profit + 1k challenge fee refund in 1 single transaction). However, Alpha Capital does not refund the challenge fee, and my total payout would be 2k. Given this scenario, I am unsure about the tax implications of receiving payouts that include challenge fee refund. For FTMO specifically, since the refund fee was paid together with the payout in 1 single transaction, does this mean the 3k would count towards and my income (because 1k of this was the fee that I paid initially so the actual income earned is only 2k). if the 3k counts as my income, does this mean the initial challenge fee (1k) is still tax deductible?
I would greatly appreciate your insights on these for tax purposes.
Thank you very much for your time and assistance. I look forward to hearing from you.
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