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I was wondering if and how I could set up a VPN or proxy server on my /mac so I can route all the internet traffic (even apps) on my iPod through it.

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If you are using a wired network on you Mac, you can create a local hotspot with the wifi on your Mac. If you then connect your iPod (touch I assume?) to the wifi network, the traffic will be automatically routed through your Mac. Read more here: http://gigaom.com/apple/create-a-wifi-hotspot-share-your-internet-connection-in-leopard/

This is not really a VPN solution, but the easiest option that reaches your goal, I think.

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The easiest form of proxy is to use SSH port forwarding. Turn on "Remote Login" in the "Sharing" section of System Preferences, then from the remote device, do:

ssh -D 1234 -l your-username address-of-mac

Then tell the remote device to connect to the internet via a SOCKS proxy at 127.0.0.1:1234. This does require you to leave the SSH client open, however. If you're using an iPod touch, that may not be possible (it certainly didn't used to be; things may have changed with the iOS 4 'multitasking') and you'll need to use a full-blown VPN or proxy server.

There are doubtless simple programs that will let you set up a proxy server, but I don't know of any.

I do know how to set up a VPN server. Like a lot of server-ish stuff, Mac OS X includes the software, but only includes a GUI for them with Mac OS X Server. iVPN provides a Mac OS X GUI for the VPN server components that are already on your Mac. In theory you could manipulate them directly for free (iVPN is shareware), but I was never able to figure out how, and iVPN is extremely straight forwards.

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What about just using native VPN (PPTP) client supplied with OSX and squidman to share the connnection? Alternatively use internet connection sharing.

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VPN and proxy servers are quite different, however both let you access network resources otherwise unavailable.

The way to set-up a VPN in MacOS is simple (i'm assuming Snow Leopard here), just go to System Preferences->Network and on the bottom left click the + sign. A pop menu should appear and in Interface select "VPN" and then your VPN type following by the name you want to give to your connection.

After that you need to configure the connection settings like the IP address and the credentials to access the VPN.

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    I need to route all the Internet Traffic on my IPOD though the computer, not the computer itself.
    – Mitchell
    Commented Oct 17, 2010 at 22:26
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I don't know if linking to an external reply is allowed here (and if not, I'm really sorry) but I wrote an article explaining how to do exactly what you want. Here it is.

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