Section 475(f) Election Deadline & Procedures

Critical Deadline Overview

The Section 475(f) mark-to-market election has strict timing requirements that are frequently misunderstood. Missing the deadline means you cannot use mark-to-market accounting for that tax year, potentially costing you tens of thousands of dollars in lost deductions.

This guide walks through every deadline scenario, filing requirement, and procedural step to ensure your 475(f) election is properly made and effective when you need it.

New Entity Election (First Year)

If you're forming a new trading entity (LLC, S-Corp, partnership), you have more flexibility in the first year. The IRS allows new entities to make the 475(f) election by the due date of the entity's first tax return.

New Entity Timeline

What Qualifies as a "New Entity"?

The IRS considers an entity "new" if it:

• Was formed during the current tax year
• Has never filed a tax return before
• Has not engaged in any trade or business in a prior year

Existing Entity Deadline (Prior Year-End)

For existing entities or individuals already trading, the election deadline is much less forgiving. You must elect by the due date (without extensions) of the prior year's tax return.

Standard Deadline Rules

Individual Traders vs. Trading Entities

Statement Filing Requirements

The 475(f) election is made by attaching a written statement to your tax return (or extension request). The statement doesn't need to be complex, but it must include specific information.

Required Elements of Election Statement

Election Statement Templates

Template 1: Individual Trader - Securities Only

Template 2: Trading Entity - Securities and Commodities

Template 3: Partnership Making Election

How to Attach the Statement

Proper attachment depends on how you file:

• Paper Filing: Include the signed statement as the first page after your return forms
• E-Filing: Most tax software allows attachment of PDFs; save your statement as PDF and upload with return
• Extension Filing: If electing via extension (Form 4868 or 7004), attach statement to extension request and mail it in (extensions are often filed electronically, but include your statement PDF)

Books & Records Changes

Once you make the 475(f) election, you must change your books and records to reflect mark-to-market accounting. This isn't just a tax return issue—your underlying accounting records must change.

Required Changes to Accounting Records

Implementation Steps

1. Update Accounting Software: Configure your accounting system to track positions at fair market value
2. Year-End Process: Establish procedure to value all open positions as of December 31
3. Reconciliation: Reconcile mark-to-market gains/losses with brokerage statements
4. Documentation: Maintain records of valuation methodology and sources (closing prices, quotes, etc.)
5. Schedule C Reporting: Report all trading gains/losses on Schedule C (not Schedule D)

First Year of Trading Rules

Special considerations apply in your first year of making the election, particularly if you held securities before the election became effective.

Transition Year Issues

Positions Held Before Election

If you held securities on the day before your 475(f) election takes effect, you have two options:

1. Include in Mark-to-Market: Apply mark-to-market treatment to all securities (including those acquired before election)
2. Segregate as Investment: Identify specific securities as "held for investment" to keep them out of mark-to-market treatment

Investment Securities Segregation

If you want to keep certain holdings out of mark-to-market treatment (to preserve potential long-term capital gains), you must:

• Clearly identify them in your books and records as held for investment (not trading)
• Make this identification before the close of the day the securities are acquired
• Maintain separate brokerage accounts (recommended) or clear subaccounting records
• Never hold investment securities in the same account as trading securities (IRS may challenge segregation)

First Year Reporting

In your first year under 475(f):

• Report all mark-to-market gains/losses on Schedule C (not Schedule D)
• Report any segregated investment securities on Schedule D as usual
• Include Form 3115 if making a change in accounting method (sometimes required, consult tax pro)
• Document the Section 481(a) adjustment if applicable

Late Election Relief (Rev. Proc. 2015-13)

If you missed the deadline, all is not lost. The IRS provides limited relief for late 475(f) elections under Revenue Procedure 2015-13. However, relief is only available if you meet strict requirements.

Eligibility for Late Election Relief

You may request late election relief if:

• You failed to make a timely election
• The deadline to elect has passed, but you have not yet filed a return for the year the election should apply
• You qualify for relief under one of the specific scenarios in Rev. Proc. 2015-13

How to Request Late Relief

1. File Form 3115 (Application for Change in Accounting Method) with your tax return
2. Explain the failure: Provide reasonable cause for why the election was missed
3. File timely: Submit the late election with your return for the first year it should apply
4. Pay user fee: Form 3115 may require a filing fee (currently $9,500 for entities with gross receipts over $1M, or $3,900 for smaller entities, but check current IRS fee schedule)

Entity Formation Timing Strategies

Strategic timing of entity formation can give you maximum flexibility with the 475(f) election.

Timing Strategy: The December Formation

Some traders form a new trading entity in late December to maximize the first-year election window:

Fiscal Year vs. Calendar Year Entities

Partial vs. Full Election

The 475(f) election gives you flexibility to elect mark-to-market for securities only, commodities only, or both. Understanding the differences is important.

Election Options

Mixed Use Scenarios

What if you trade some securities as a trader (frequent, short-term) but hold other securities as investments (long-term)?

Strategy 1: Full Election with Investment Segregation

• Elect 475(f) for all trading securities
• Clearly identify investment holdings and segregate them (preferably separate account)
• Investment holdings keep capital gain treatment
• Requires strict recordkeeping and contemporaneous identification

Strategy 2: No Election, All Capital

• Don't make 475(f) election
• All securities remain capital assets (subject to wash sales and $3,000 loss limit)
• Simpler recordkeeping
• May lose significant tax benefit if you have trading losses

Strategy 3: Separate Trading Entity

• Form separate entity solely for trading business
• Make 475(f) election at entity level
• Keep personal investment account separate (capital treatment)
• Clean separation, best for audits, but adds entity maintenance costs

Securities vs. Commodities Classification

Knowing whether an instrument is a "security" or "commodity" under Section 475 determines which election you need.

Classification Guide

Section 1256 Contracts

Many commodities and futures are Section 1256 contracts, which normally get favorable 60/40 tax treatment (60% long-term, 40% short-term, regardless of holding period). The 475(f) election overrides Section 1256 treatment.

• Without 475(f): Section 1256 contracts = 60% LTCG (20% max rate) + 40% STCG (up to 37%)
• With 475(f): All gains/losses are ordinary income (up to 37%, but losses fully deductible)

Make sure the loss deduction benefit outweighs the loss of preferential 60/40 treatment. Run the numbers before electing.

Common Filing Errors to Avoid

IRS Examination Red Flags

The IRS is particularly likely to challenge 475(f) elections that:

• Lack clear documentation of trader tax status (insufficient trading frequency/volume)
• Were made late without proper relief procedures
• Don't match the taxpayer's actual trading pattern (e.g., election for securities when you only trade forex)
• Show inconsistent treatment between mark-to-market and investment positions
• Claim ordinary losses in one year, then revoke election to claim LTCG the next (requires IRS consent to revoke)

Election Deadline Flowchart

Complete Timeline Checklist

Year-by-Year Election Calendar

Sample 3-Year Election Timeline

Revoking a 475(f) Election

Once you make the 475(f) election, you're generally stuck with it. The IRS does not allow you to turn it on and off based on whether you had gains or losses in a given year.

IRS Consent Required

To revoke a 475(f) election, you must:

• File Form 3115 (Application for Change in Accounting Method)
• Request IRS consent to revoke
• Demonstrate a substantial change in business circumstances justifying revocation
• Pay applicable user fees (can be several thousand dollars)

Automatic Termination Scenarios

The election automatically terminates if:

• You cease to be engaged in a trade or business of trading
• The entity making the election dissolves or terminates
• You no longer meet trader tax status requirements