Are Prop Firm Challenge Fees Tax-Deductible?
Traders spend hundreds or even thousands on prop firm challenge fees each year. But can you deduct those costs on your taxes? The answer isn’t always obvious. The IRS rules around trading expenses are nuanced, and the details matter—especially when dealing with firms like FTMO ($155–$1,080 challenge fees) or E8 Markets ($48–$988).
This guide unpacks the practical realities using real numbers from leading prop trading firms. You’ll find out when you can deduct challenge fees, when you can’t, and how to avoid the most common (and costly) mistakes.
Who Can Deduct Prop Firm Challenge Fees?
Traders vs. Investors: The IRS Distinction
The IRS draws a sharp line between “traders” and “investors.” Only those who qualify as a trader in securities (or commodities) can deduct trading-related business expenses—including prop firm challenge fees. Investors, on the other hand, generally cannot deduct these as itemized expenses since the 2018 tax law changes.
- Trader: Trading must be your primary business, with frequent, substantial, and continuous activity. This often means dozens of trades per month, holding periods of days (not months), and a genuine intent to profit from short-term price moves.
- Investor: Someone who buys and sells less frequently, often holding positions for weeks or months, and for whom trading is not a primary business activity.
If you’re actively trading prop firm challenges—say, you paid $1,080 for an FTMO $200K evaluation, or $657 for an Apex Trader Funding $300K futures challenge—and trading is your principal occupation, you may qualify as a trader in the eyes of the IRS.
Business Structure: Individual, LLC, S-Corp?
How you trade also matters. If you trade in your own name, you can deduct business expenses on Schedule C if you qualify as a trader. If you use an entity (LLC, S-Corp), deductions may be taken at the entity level. Some traders choose an entity to simplify deductions and cleanly separate business from personal expenses.
What Counts as a Deductible Challenge Fee?
Challenge fees paid to firms like FTMO, E8 Markets, or Apex Trader Funding are generally considered ordinary and necessary business expenses if they directly relate to your trading activity. This includes:
- Initial challenge (evaluation) fees (e.g., $155–$1,080 for FTMO, $48–$988 for E8 Markets)
- Monthly subscription fees (e.g., $49–$149/mo for TopStep, $77–$477/mo for My Funded Futures)
- Retake or retry fees (if you pay again after failing an evaluation)
- Platform fees, data fees, or other required costs to maintain a funded account
Refunded fees—such as FTMO’s “free retake if profit target met” or fee refunds after a certain number of payouts (Blue Guardian: refund after 4th payout)—are not deductible if you ultimately get them back. Only non-reimbursed, out-of-pocket costs count.
Real-World Example
If you pay $399 for a $50K E8 Markets challenge and do not get funded (or refunded), the $399 is a business expense. If you pass and the firm refunds your fee after your first payout (as some models do), you can only deduct the cost if you don’t get the money back.
Comparison: Challenge Fee Deductibility Across Firms
| Firm | Challenge Fee Range | Refund Policy | Fee Structure | Deductible? |
|---|---|---|---|---|
| FTMO | $155–$1,080 | Refund after first funded payout; free retake if target met | One-time fee per challenge | Yes, if not refunded |
| E8 Markets | $48–$988 | Refund after first payout | One-time fee per challenge | Yes, if not refunded |
| TopStep | $49–$149/mo | Ongoing monthly fee; no refund | Subscription | Yes |
| Apex Trader Funding | $147–$657 | Monthly fee after evaluation; discounts common | Subscription | Yes |
| FundedNext | $59–$999 | Various challenge models; refund after payout on select models | One-time fee per challenge | Yes, if not refunded |
| The5ers | $95–$875 | Refund on funded accounts after first payout | One-time fee per challenge | Yes, if not refunded |
| MyFundedFX | $49–$1,499 | Refund after funded payout on most models | One-time fee per challenge | Yes, if not refunded |
| My Funded Futures | $77–$477/mo | Subscription; no refund | Monthly subscription | Yes |
Use the PropSurvivalEngine comparison tool to see firm-by-firm fee structures and refund policies in detail.
International Traders: Local Tax Nuances
Tax treatment for prop firm challenge fees can differ significantly outside the US. In the UK, for example, “trading as a business” (vs. investing) can allow expense deductions, but HMRC criteria are strict. In Australia, the ATO recognizes professional trading as a business with deductible expenses, but only for those who meet specific volume and intent standards.
For EU, Canada, and other jurisdictions, check with a local tax professional who understands trading businesses. Many countries also require that expenses be “wholly and exclusively for the purpose of trade,” and some may treat refunds differently.
Gray Areas and Trade-Offs
1. Refundable Fees: Timing and Reporting
If you pay a $399 challenge fee to FTMO and pass, you typically get that fee refunded after your first payout. You can’t deduct it as an expense if you get it back. However, if the fee is refunded in a different tax year, you may need to report the refund as income in the year received, even if you deducted it the previous year.
2. Multiple Challenges: Deductibility Limits
If you attempt three E8 Markets challenges ($399 each) and only pass one, you can only deduct the non-refunded fees. This can add up quickly: $798 in failed fees is deductible, but the $399 refunded after passing is not.
3. Monthly Subscription Models
Firms like TopStep ($49–$149/month) and My Funded Futures ($77–$477/month) charge ongoing fees. These are deductible as long as they are ordinary and necessary to your trading business. However, if you pause or cancel your subscription, only payments made during active trading periods count.
4. Entity vs. Individual Deduction
Trading via an LLC or S-Corp can make deductions cleaner and may reduce audit risk, but comes with extra paperwork and costs. For high-volume traders, the trade-off may be worth it. For those with only a handful of challenges per year, the added complexity may not justify the benefits.
Documentation: What You Need to Prove Your Deduction
- Receipts or invoices from the prop firm showing the fee amount and date
- Proof of payment (bank statement, PayPal, credit card, etc.)
- Challenge agreement or terms showing the purpose of the fee
- Evidence of active trading (trade logs, account statements, profit/loss records)
- Refund records if any fee is reimbursed
Keep digital and paper copies for at least 3–7 years, depending on your country’s statutes of limitations.
Common Mistakes to Avoid
- Deducting refunded challenge fees (must be added back as income if refunded later)
- Claiming expenses as an investor (not allowed under US tax law post-2018)
- Failing to document trading activity (IRS/HMRC/ATO may deny trader status if you lack proof)
- Mixing personal and trading expenses (especially risky if using a personal account)
- Ignoring entity-level filing requirements (if using an LLC/S-Corp, you must file separately)
For more on trading business health and audit risk, see the PropSurvivalEngine Health Grades tool.
Case Studies: Real-World Scenarios
Scenario 1: High-Volume Forex Trader (FTMO/E8/Blue Guardian)
Jane spends $1,080 on an FTMO $200K challenge, $988 on an E8 Markets $250K challenge, and $897 on a Blue Guardian $200K challenge in the same year. She passes only FTMO, gets that fee refunded after her first payout, and fails the other two.
- Deductible fees: $988 (E8) + $897 (Blue Guardian) = $1,885
- Not deductible: $1,080 (FTMO; refunded after payout)
If Jane deducted the FTMO fee in Year 1 but received the refund in Year 2, she must declare $1,080 as income in Year 2.
Scenario 2: Futures Trader Using Subscription Model (TopStep/My Funded Futures)
Mike trades with TopStep at $149/month and My Funded Futures at $477/month. He pays a total of $3,768 for the year ($149 x 12 + $477 x 6, assuming he only used My Funded Futures for half the year).
- Deductible fees: $1,788 (TopStep) + $2,862 (My Funded Futures) = $4,650
- Not deductible: Any months he wasn’t actively trading as a business
How to Maximize Your Deduction (and Minimize Audit Risk)
- Keep meticulous records—save every challenge fee receipt and trading log
- Consider forming an LLC or S-Corp for clean separation of business and personal expenses
- Consult a tax pro who understands active trading and prop firm models
- Only deduct fees you did not get refunded
- Report any refunded fees as income in the year received
- Document your trading activity, frequency, and intent to prove trader status
Use the PropSurvivalEngine calculator to estimate your total annual challenge fees and potential deductions.
Bottom Line
Prop firm challenge fees—whether $155 for an FTMO $10K account or $1,499 for a MyFundedFX $300K challenge—are only tax-deductible if you qualify as a business trader, not a passive investor. Refundable fees can’t be deducted unless you never receive the refund, and monthly subscription models (like TopStep or My Funded Futures) are only deductible while you’re actively trading as a business.
Document everything, avoid double-dipping, and consult a trading-savvy tax professional before filing. If you’re serious about trading as a business, structure your records—and your trading activity—to withstand IRS or local tax authority scrutiny. The right deduction strategy can save you thousands each year, but only if you play by the rules.
For a tailored breakdown of challenge fees, refund rules, and trading business health by firm, check out the comparison and health tools at PropSurvivalEngine.com.