Prop trading and business activity. Proprietary trading – often called “prop trading” – has gained tremendous popularity in recent years. By allowing traders to operate with someone else’s capital, it removes one of the main barriers to entering financial markets: the lack of sufficient personal funds. That’s why prop trading is such an attractive option for many talented individuals looking to scale their operations. However, alongside the clear benefits, it’s crucial not to overlook the formal and legal aspects — especially when it comes to tax compliance. A key question arises: how should income from prop trading be classified under Polish tax law — as business activity or as income from personally performed services (e.g., under a contract for services)? This distinction has important tax implications. In this article, we explore that relationship — prop trading and business activity — in detail.
What Is Proprietary Trading?
Prop trading involves placing financial market trades using funds provided by a specialized organization — a proprietary trading firm. The trader does not use their own money, but instead operates with the firm’s capital, sharing a portion of the profits according to agreed terms.
These firms often run a selection process to evaluate candidates’ trading skills. From a trader’s perspective, the main benefit is clear: access to market opportunities without having to commit significant personal capital.
Prop Trading and Business Activity – Sole Proprietor or Contracted Service?
In Poland, the classification of income from proprietary trading is not always clear-cut, especially from a tax perspective. The way this income is taxed depends on multiple factors: the type of agreement, the legal status of the trading firm, and the nature of the trader-firm relationship.
Traders often ask: how should the relationship between prop trading and business activity be understood? Should cooperation with a prop trading firm be considered as business activity or as work performed under a contract for services?
Prop trading and business activity
Zgodnie z art. 5a pkt 6 ustawy PIT, przez działalność gospodarcząAccording to Article 5a point 6 of the Polish PIT Act, business activity is defined as income-generating activity carried out in an organized, continuous, and independent manner.
If a trader:
- operates independently,
- assumes financial risk,
- works continuously and for personal profit,
…then their prop trading may meet the definition of business activity. This would require registration of a sole proprietorship and taxation according to the selected method (e.g., progressive tax, flat tax, lump sum).
Contract for Services and Prop Trading
AArticle 5b section 1 of the PIT Act states that activity is not considered business activity if all the following conditions are met:
- the party ordering the work is liable to third parties for the results,
- the work is performed under their supervision, at times and in places set by them,
- the worker does not bear any financial risk.
If:
- the prop firm controls when and how the trader operates,
- the firm absorbs all trading-related risks,
- and the firm bears third-party responsibility for the trader’s actions,
…then income from such activity should not be classified as business income. In that case, the relationship between prop trading and business activity shifts, and the trader may be seen as providing a personal service under a contract.
The Polish Tax Office’s Approach
In practice, the classification of income from prop trading is evaluated case by case. The Polish tax authorities may interpret the relationship differently depending on the specific circumstances. The safest solution is to apply for an individual tax ruling, which offers legal clarity and protection in case of a future audit.
Summary
Prop trading and business activity – how are they connected? With prop firms growing in popularity, understanding the correct legal and tax classification is essential.
While trading with external capital offers significant opportunities, it also involves legal responsibilities. Before starting cooperation with a proprietary trading firm, it’s worth analyzing how your activity will be classified and what tax obligations it may generate. When in doubt, consult a tax advisor or request an individual tax interpretation.
If you have any questions about prop trading and taxes, feel free to visit www.outsourced.pl.
