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    Mark-to-Market Election (Section 475): Should You Elect MTM for Trading?

    9 min readTraderTaxHQ

    The Section 475 mark-to-market election is a powerful tax tool for qualifying traders, but it's not right for everyone. Understanding when it makes sense is crucial.

    What is Mark-to-Market?

    Mark-to-market (MTM) accounting treats all securities held at year-end as if they were sold on December 31st at fair market value. All gains and losses are treated as ordinary income/loss rather than capital gains/losses.

    Key Benefits of MTM

  1. No wash sale rules: The wash sale rule does not apply to MTM traders
  2. Unlimited loss deduction: Losses are ordinary, not subject to $3,000 capital loss limit
  3. Loss carryback: May qualify to carry losses back to prior years

    4. Potential Drawbacks

  4. Loses long-term treatment: All gains become ordinary income (higher rates)
  5. Year-end recognition: Must recognize gains on open positions
  6. Irrevocable: Very difficult to revoke once elected

    7. Who Should Consider MTM?

    MTM generally makes sense for traders who:

  7. Have significant wash sale disallowances
  8. Experience large trading losses
  9. Trade frequently and hold positions briefly
  10. Rarely hold positions long enough for long-term treatment

    11. How to Make the Election

    The MTM election must be made by attaching a statement to your tax return filed by the due date (including extensions) of the tax year BEFORE the year you want MTM to apply. This is a strict deadline with no exceptions.

    Election Statement Requirements

    Your election statement should include:

  11. Your name and address
  12. Statement that you're making an election under Section 475(f)
  13. The first tax year the election is effective
  14. The trade or business for which you're making the election

    15. Frequently Asked Questions

    What is the deadline for the mark-to-market election?
    Existing taxpayers must attach the Section 475(f) statement to the prior year's tax return or extension by April 15 of the year it takes effect. New entities elect internally within 75 days of formation.
    Can I revoke a mark-to-market election?
    Yes, but revocation requires the same filing procedure and timing as making the election, and the IRS generally will not allow you to switch back and forth opportunistically.
    Should every trader make the election?
    No. It removes long-term capital gains rates and 60/40 treatment on Section 1256 contracts, so it mainly benefits securities traders with heavy wash sales or large losses.

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