Prop Trader, do you need a VAT number? How to manage your income

How should the prop trading activity be managed from a tax perspective? What precautions should professionals who work in this sector take? There are several individuals who carry out trading activities on a daily basis: this is why it is important to manage the activity correctly from a tax perspective and, above all, to know when it is necessary to open a VAT number to carry out the profession correctly.

What do prop trading and prop firm mean?

Among the professions that have begun to emerge in recent years is that of the prop trader: an expert who manages an investment portfolio on behalf of one or more proprietary firms .

Generally this type of company is not a brokerage firm, but a financial company that deals with managing the financial portfolio on behalf of investors. To guarantee this service, proprietary firms rely on professional traders , to whom they provide a financial portfolio to manage.

The prop trader is not a financial advisor and does not directly manage the risk. The trader is given a sum of money: he is not responsible for losses , but obtains a share of the profits that derive from his investment activities.

The direct relationship with the investor is managed directly by the prop house , while the prop trader takes care of the investment management. The client, however, has the right to interrupt the collaboration in the event that a significant loss is recorded.

How should a prop trader be classified from a tax perspective?

The prop trader or proprietary trader invests in the financial markets using capital that is not his own, but that is made available by the specialized company. When the activity is carried out continuously and professionally, obviously with the aim of generating income for himself and his clients, it is in all respects a self-employed activity.

In order to exercise it, therefore, the professional is required to open a VAT number. We are faced with a case in which it is difficult to argue that the service is performed occasionally , due to the way in which the collaboration is organized and managed.

When is a VAT number required?

When an investor trades with his own capital , he is not required to open a VAT number. Any profits and related losses can be managed in the tax return even by a private individual.

When you invest your savings – perhaps by relying on a broker – you are not considered a professional activity. The situation, however, changes when you start managing capital on behalf of third parties, whether it is received from savers or from specialized companies. The activity carried out begins to take on a slightly more professional profile and it is necessary to open a VAT number.

We are faced with a very important aspect that should not be underestimated. The moment you start to operate professionally on behalf of third parties, even when you do trading activities, you are carrying out a real economic activity. This is the reason why it is necessary to be in compliance with all administrative obligations , even opening a VAT number.

The opening of your professional position must be contextual to the start of the activity: all the necessary formalities must be carried out when you receive the first assignment . Deciding to operate privately exposes the trader to a series of risks : in the event that there were to be investigations by the Revenue Agency, sanctions could arrive.

How to choose the right tax regime

Once the VAT number is opened, the prop trader must also choose the tax regime that best suits his situation. In the event that the compensation should remain below 85,000 euros per year, it is possible to resort to the flat rate , which allows you to avoid VAT, Irpef and Irap obligations. And above all, it provides for a taxation of 5% for the first five years and 15% from the sixth onwards.

To join the flat-rate scheme it is necessary to:

• have revenues or compensation of less than 85,000 euros per year;
• receive income from employment or pensions of less than 35,000 euros;
• have employee hiring costs of less than 20,000 euros;
• you must not hold shares in partnerships, associations or limited liability companies that carry out activities similar to the professional activity you exercise.

Which Ateco code to choose

Some problems arise for the correct choice of the Ateco code . For the moment, for the prop trader activity, there is a lack of official clarifications from the Revenue Agency, even after they have been updated.

Very pragmatically, this means that there are no indications to know how the activity should be classified, as there is no specific code. In order to open a VAT number, therefore, it is necessary to identify one of the existing codes that are linked to residual activities, which are not expressly indicated.

The Ateco code that can be used for the prop trader activity (or rather the one that comes closest to it) is the following:

• 66.12.00 – trading activities in contracts relating to securities and commodities.

What is the pension fund?

At the moment, among other things, there is also a lack of official clarifications regarding the more specifically social security aspects of this activity. In principle, it can be considered a real professional activity, which should include registration with the separate INPS management .

This particular fund provides for the payment of a social security rate that must be applied to the income produced annually. In any case, it is necessary to verify the situation of the individual professional and ascertain that there is no different classification from a social security point of view.

Registration to the Ocf

Ocf is the acronym for the Supervisory and Protection Body of the Register of Financial Consultants . These professionals help savers plan their financial resources , in order to achieve the goals they have set for themselves.

Registration with the Ocf occurs after passing an exam . Here a further doubt arises: does the prop trader, in order to operate, have to register with this register? Unfortunately, even in this case, there is a lack of official clarifications that can dispel any doubts in one direction or the other.

Financial consultancy

In any case, the prop trader does not have a direct relationship with the saver , but with an investment company. It is only the latter that maintains relationships with private individuals. The prop trader, it is worth emphasizing, acts solely on a platform in which orders are first evaluated and then approved by the prop house.

This situation drastically differentiates the activity of the prop trader from that of the financial advisor. But even in this case, it is advisable to directly consult with the Ocf to verify that your activity does not also require this registration.