The Mark-to-Market (MTM) election under IRC Section 475(f) allows qualified traders to treat all securities as if they were sold at fair market value on the last business day of the tax year. This powerful tax strategy converts capital gains and losses into ordinary income and losses, providing significant tax benefits for active traders.
Traditional vs MTM Accounting
Traditional (Capital Gains)
Gains/losses are capital in nature. Net losses limited to $3,000/year deduction against ordinary income. Wash sale rules apply. Unused losses carry forward.
Mark-to-Market (Section 475)
All gains/losses become ordinary income. No $3,000 limitation on losses. Wash sale rules eliminated. Losses can create NOL for carryback/carryforward.
Key Benefits of MTM Election
Eliminate $3,000 Loss Limitation: Deduct unlimited trading losses against other income
No Wash Sale Rules: Freely trade in and out of positions without disallowed losses
Net Operating Loss (NOL): Large losses can create NOLs to offset income in other years
Business Expense Deductions: Deduct trading-related expenses on Schedule C
QBI Deduction Eligibility: May qualify for the 20% qualified business income deduction
How the MTM Election Works
Step 1: Qualify as a Trader
You must meet IRS criteria for "trader" status (not just an investor). This requires substantial, regular, and continuous trading activity with the intent to profit from short-term price movements. The IRS looks at factors like trade frequency, holding periods, and time devoted to trading.
Step 2: Make the Election
The Section 475(f) election must be made by attaching a statement to your tax return for the year before the election takes effect. The deadline is the original due date (April 15 for most). For example, to elect MTM for 2025, you must file by April 15, 2025.
Step 3: Report on Schedule C
With MTM, all trading gains and losses are reported as ordinary business income on Schedule C. You mark all positions to market at year-end, recognizing gains and losses on open positions as if sold.
Step 4: Year-End Mark-to-Market
On the last business day of the tax year, you must treat all securities as sold at fair market value. This recognizes unrealized gains/losses for tax purposes. The fair market value becomes your new cost basis going into the next year.
Election Statement Requirements
The election statement must include:
Your name and taxpayer ID number
A statement that you are making an election under Section 475(f)
The first tax year for which the election is effective
The trade or business for which you're making the election
Trader vs Investor Qualification
The IRS distinguishes between "traders" and "investors" - only traders can make the MTM election. Understanding this distinction is critical.
Trader Characteristics (Can Elect MTM)
Seeks profit from daily market movements, not dividends or long-term appreciation
Trades frequently and substantially (typically daily or near-daily)
Holds positions for short periods (days to weeks, not months)
Devotes substantial time to trading activities
Trading activity is regular and continuous throughout the year
Investor Characteristics (Cannot Elect MTM)
Holds securities primarily for long-term capital appreciation
Interested in dividends, interest, or long-term growth
Trades infrequently or sporadically
Has a buy-and-hold strategy
Trading is not a significant activity
Key Factors the IRS Considers
Trade Frequency
Courts have found trader status with as few as 330 trades per year, but more is generally better. Daily or near-daily trading strengthens your case.
Holding Period
Traders typically hold positions for days to weeks. Holding stocks for months suggests investor status. Day trading strongly supports trader status.
Time Devoted
Full-time traders have the strongest case. Part-time trading can qualify if substantial and regular. Document your time commitment.
Intent
Your goal must be profiting from short-term price movements, not dividends or long-term appreciation. Document your trading strategy.
Key Benefits of the MTM Election
1. Bypass the $3,000 Capital Loss Limitation
Under traditional rules, net capital losses can only offset $3,000 of ordinary income per year. With MTM, all losses are ordinary, meaning unlimited losses can offset wages, business income, and other ordinary income. For a trader with $50,000 in losses, this could save $15,000+ in taxes in a single year.
2. Eliminate Wash Sale Rules
The wash sale rule normally disallows losses when you buy substantially identical securities within 30 days. MTM eliminates this concern because all positions are marked to market at year-end anyway. Active traders can freely trade without tracking wash sales.
3. Net Operating Loss (NOL) Benefits
Large MTM losses can create a Net Operating Loss. While capital loss carryovers can only offset future capital gains (plus $3,000/year), NOLs can be carried forward indefinitely to offset up to 80% of taxable income. This provides valuable flexibility for traders with volatile years.
4. Business Expense Deductions
MTM traders report on Schedule C, allowing full deduction of business expenses including:
Trading software and data subscriptions
Computer equipment and monitors
Home office expenses
Education and research materials
Professional fees (CPA, attorney)
Margin interest (as business expense)
5. Potential QBI Deduction
Traders with Schedule C income may qualify for the 20% Qualified Business Income (QBI) deduction under Section 199A. This effectively reduces the top marginal rate on trading income. However, the QBI deduction has income limitations and complex rules.
Important Considerations
Irrevocable: Once made, the election can only be revoked with IRS consent (rarely granted)
Self-Employment Tax: MTM income is generally not subject to self-employment tax
No Long-Term Rates: You lose access to preferential long-term capital gains rates (0%, 15%, 20%)
Year-End Recognition: Must recognize gains/losses on open positions at year-end
Frequently Asked Questions
The Section 475(f) election allows qualified traders to treat all securities as sold at fair market value on the last business day of the tax year. This converts capital gains/losses to ordinary income/losses, eliminating the $3,000 capital loss limitation and wash sale rules. The election must be made by the tax return due date for the year before it takes effect.
The election must be filed by the original due date (not including extensions) of your tax return for the year before the election takes effect. For most taxpayers, this is April 15. To elect MTM for 2025, you must file the election statement by April 15, 2025. New traders can make a late election within 2 months of starting their trading business.
Traders engage in frequent, substantial trading activity with the intent to profit from short-term price movements. They typically trade daily or near-daily and hold positions for short periods. Investors hold securities for long-term appreciation and dividends, trading infrequently. Only traders can make the MTM election - investors cannot.
Under MTM accounting, all positions are "marked to market" (treated as sold and repurchased at fair value) on the last business day of the tax year. Since gains and losses are recognized regardless of whether positions are closed, there are no deferred losses for the wash sale rule to disallow. Active traders can freely trade without worrying about the 30-day wash sale window.
Under normal tax rules, if your capital losses exceed capital gains, you can only deduct $3,000 of net capital losses against ordinary income per year ($1,500 if married filing separately). Excess losses carry forward to future years. MTM converts losses to ordinary, bypassing this limitation entirely - allowing unlimited loss deductions against ordinary income.
When MTM trading losses exceed all other income, you create a Net Operating Loss. NOLs can be carried forward indefinitely to offset up to 80% of taxable income in future profitable years. This is far more valuable than capital loss carryforwards, which can only offset capital gains (plus $3,000/year). NOLs provide flexibility to recover from bad trading years.
No. Trading income and losses under the MTM election are generally not subject to self-employment tax (15.3%), even though reported on Schedule C. This is because securities trading is specifically excluded from self-employment income under IRC Section 1402. This is a significant advantage compared to other Schedule C businesses.
The MTM election is effectively irrevocable. You can request revocation from the IRS, but approval is rarely granted. The IRS will only consider revocation if there's a material change in circumstances. Once you elect MTM, you should assume it's permanent. Carefully consider the decision before making the election.
Yes. With MTM, all gains are ordinary income, taxed at rates up to 37%. You lose access to preferential long-term capital gains rates (0%, 15%, or 20%). However, if you're an active trader, most gains would be short-term anyway (taxed as ordinary income). MTM is most beneficial for traders who primarily hold short-term positions.
Form 3115 (Application for Change in Accounting Method) is required if you're changing from traditional accounting to MTM for an existing trading business. It's filed with your tax return for the year of change. New traders making a timely election don't need Form 3115 - only the election statement. The form ensures proper transition of unrealized gains/losses.
There's no specific trade count requirement, but courts have found trader status with as few as 330 trades per year (about 1-2 per day). More trades strengthen your case. Other factors matter too: holding period, time devoted, trading intent, and regularity throughout the year. Day traders with hundreds of daily trades have the clearest qualification.
This is a gray area. Section 475(f) specifically applies to "securities" and "commodities" as defined in the tax code. Cryptocurrency doesn't clearly fit these definitions. Some tax professionals argue crypto qualifies; others are more conservative. Consult a tax professional before making this election for crypto trading. The safest approach may be a formal ruling request.
MTM traders report on Schedule C and can deduct ordinary business expenses including: trading software/platforms, market data subscriptions, computer equipment, home office expenses, education/research materials, professional fees (CPA, attorney), margin interest (as business expense), and other trading-related costs. Keep detailed records to support deductions.
Potentially yes. The 20% Qualified Business Income (QBI) deduction under Section 199A applies to qualified business income from Schedule C activities. However, the deduction phases out at higher income levels ($191,950 single / $383,900 MFJ for 2025) and has complex rules. Not all trading income may qualify. Consult a tax professional for your specific situation.
When you elect MTM, you must mark all existing positions to market on the first day the election is effective. This means recognizing gain or loss as if you sold everything at fair market value. This "Section 481(a) adjustment" can be spread over 4 years if it results in income. Losses are recognized immediately. Proper planning is essential.
This depends on your situation. An LLC doesn't change the tax treatment but provides liability protection. An S-Corp can provide some advantages for traders with consistent profits. However, entity formation adds complexity and costs. Many traders operate as sole proprietors on Schedule C. Consult a tax professional to determine the best structure for your situation.
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