If you lose money on a funded account, you lose the account and any profits sitting in it, but you don’t owe the prop firm a cent beyond the evaluation and platform fees you already paid. The trades happen on a simulated feed, so there’s no real capital for you to have blown through, and your contract structures you as an independent contractor rather than a borrower. Your credit is untouched, no collector will call, and you can pay for a new evaluation whenever you want to try again.
Why You Don’t Owe the Firm Anything
Most modern prop firms don’t route your orders to a live exchange. Your account runs on a simulated price feed that mirrors real market conditions, and if you generate profits the firm pays you out of its own revenue. Losses exist only inside the simulation. The firm never lost money on your trades, so there’s nothing for it to recover from you.
The contract reinforces this. You sign on as an independent contractor providing a service, not as a partner sharing business risk or a trader borrowing capital. No debt is created by poor performance. The business model already accounts for the fact that most evaluation buyers will fail: fees from failed traders are how the firm makes its money, and automated drawdown rules make sure the firm never has to chase anyone.
How the Account Actually Gets Terminated
Two loss thresholds sit inside every funded account, and hitting either one ends the relationship immediately.
- Daily drawdown. This caps how much value the account can lose in a single session. The industry standard is around 5% of the account balance. On a $100,000 account, a $5,000 intraday loss locks you out for the day or terminates the account outright, depending on the firm.
- Maximum drawdown. This tracks cumulative losses from the account’s highest recorded value. Firms usually set it between 8% and 12% of the starting balance. Some use a trailing calculation that follows your equity high-water mark; others use a static threshold measured from the initial balance.
Crossing either threshold triggers an automatic stop-out. The platform closes your open positions and revokes access in real time. No grace period, no appeal. Your dashboard flips to “failed” or “terminated” within seconds of the price feed crossing the line.
There’s a quieter way to lose the account too. Most firms require at least one trade every 30 days to keep it active. Miss the window and the firm treats it as a breach, terminating the account exactly as it would for excessive losses. Traders who step away after a rough stretch to clear their heads sometimes come back to find the account already gone.
What Happens to Profits in the Account
If your balance shows gains at the moment of a drawdown breach, those gains disappear with the account. The breach voids the agreement, and any remaining balance reverts to the firm. Sitting on $5,000 in unrealized profit when you cross the threshold means you walk away with nothing from that account cycle.
Profits only become yours once the firm has processed a payout. Everything before that point is a number on a dashboard that the firm can claw back if you violate the rules. A handful of firms offer a partial share upon termination under narrow circumstances, but treating that as a safety net is a mistake. The default outcome of a breach is total forfeiture of anything not already withdrawn.
The One Way You Can Actually Owe Money
The liability shield disappears if you cheat. Manipulating the platform, exploiting data-feed glitches, coordinating trades across multiple accounts to game the rules, or committing outright fraud all put you on the hook. Prop firm contracts universally reserve the right to pursue damages for intentional misconduct, which tracks the broader legal principle that limited liability doesn’t cover a person’s own fraudulent or tortious acts.
Standard trading losses from bad reads and sloppy risk management stay the firm’s problem. Deliberate rule-breaking is yours.
The Money You Actually Lose
Your financial exposure is limited to what already left your bank account. That usually means several categories of fees.
- Evaluation fees. Traditional models charge the full fee upfront. Newer “pay after you pass” models let you start for as little as $1 and charge an activation fee once you demonstrate proficiency, with post-pass amounts ranging from under $100 for small accounts to over $2,000 for the largest tiers.
- Platform subscriptions. These typically run $30 to $80 a month once you enter the funded phase.
- Market data fees. Professional data can run $130 or more per exchange per month.
Platform and data charges keep running regardless of how the account performs. After termination, getting back in means paying a new evaluation fee and completing the entire challenge process again. No firm carries over partial progress from a failed attempt. A trader who resets three or four times while paying ongoing data fees can easily spend more than they ever withdraw in profit splits.
The Tax Side of a Losing Year
Fees you paid to the firm are deductible as ordinary and necessary business expenses on Schedule C.1IRS. Instructions for Schedule C (Form 1040) Evaluation fees, reset fees, platform subscriptions, and data charges all qualify.
Losses inside the funded account do not. You didn’t own that capital, so there’s no capital loss to claim, no $3,000 annual offset against other income, and wash sale rules don’t apply. The only writeoffs are dollars that actually left your own bank account. If you cycled through several failed evaluations during the year, track every fee payment carefully, because those deductions are the only tax benefit available when the trading itself went badly.
On the other side, any profit splits you did collect are business income, not capital gains. The firm reports payouts on a 1099, you report the income on Schedule C, and you owe self-employment tax at 15.3% on top of regular income tax if your net self-employment earnings for the year exceed $400.2IRS. Self-Employment Tax (Social Security and Medicare Taxes)
The Loss That Isn’t a Trading Loss
Blowing an account through a drawdown breach is financially contained. The scenario that actually costs traders serious money is picking a firm that disappears, changes its payout rules, or never intended to pay in the first place.
Most prop firms are not registered broker-dealers or futures commission merchants. The simulated account model puts them outside the regulatory frameworks that protect customers of traditional brokerages, so recourse is limited when things go wrong. The CFTC has brought enforcement actions in this space, but proving fraud against an offshore firm that trades in simulated environments is procedurally difficult, and even successful cases don’t guarantee that traders recover their fees.
The MyForexFunds matter is the clearest illustration. The CFTC alleged the firm presented itself as a partner in traders’ success while functioning as a counterparty to their simulated trades, using software to create artificial slippage and hidden fees that stacked the odds against customers. The agency also alleged that payouts to profitable traders came from evaluation fees paid by newer customers rather than from any genuine trading activity. The case was dismissed on procedural grounds related to the CFTC’s own conduct during litigation, not because the fraud allegations were refuted.
Other firms have simply shut down their prop divisions without warning, leaving traders locked out and unpaid profit splits stranded. Before paying for any evaluation, look for firms that have been operating and paying traders consistently for at least two years, and read reviews from actual traders rather than affiliate marketing sites. The evaluation fee is the real money at risk. Trading skill won’t protect you from a firm that doesn’t pay.