The mark-to-market election for traders, made under Section 475(f) of the Internal Revenue Code, lets a qualifying securities or commodities trader treat every open position as if sold at fair market value on the last business day of the year, turning all trading gains and losses into ordinary income and loss. That single change removes the $3,000 annual cap on capital losses, sidesteps the wash sale rules, and simplifies reporting. It also locks you into the method until you go through a formal revocation, and it’s only available if you meet the IRS’s strict definition of a trader and file the election statement by an early deadline most people miss.
Who Qualifies as a Trader in Securities
The election is closed to investors. Before anything else, you have to meet the IRS’s definition of a trader in securities, and the bar is high. Three conditions all have to be present:
- You seek to profit from daily or short-term price swings, not from dividends, interest, or long-term appreciation.
- Your trading volume and frequency are substantial, typically hundreds or thousands of trades per year.
- You trade with continuity and regularity throughout the year, not in sporadic bursts.
Beyond those thresholds, the IRS weighs how long you typically hold positions (days or weeks points to trader status; months or years points to investor), how much of your time goes to the activity, and whether trading is a meaningful source of your income.1Internal Revenue Service. Topic No. 429, Traders in Securities
Volume alone doesn’t do it. In Moller v. United States, a taxpayer who spent 20 to 25 hours a week trading was denied trader status because the court found the activity was aimed at long-term gains rather than short-term swings. Intent matters as much as trade count. If you can’t show short-term focus, substantial activity, and regularity together, the IRS will treat you as an investor and the election isn’t available to you.
What the Election Actually Changes
Unlimited Loss Deductions
This is the main reason traders make the election. Without it, a net capital loss offsets only $3,000 of ordinary income per year ($1,500 if married filing separately), with the excess carried forward.2Internal Revenue Service. Topic No. 409, Capital Gains and Losses For an active trader who drops $150,000 in a bad year, that cap means decades of carryforward.
Under mark-to-market, every trading loss becomes an ordinary loss, fully deductible in the year it occurs against wages, business income, or any other ordinary income. A $150,000 loss reduces adjusted gross income by $150,000 in the same year.
No Wash Sale Rule
The wash sale rule normally disallows a loss deduction when you sell at a loss and buy a substantially identical security within 30 days on either side. For traders who cycle in and out of the same names, wash sales defer losses and inflate the basis of replacement shares, creating tracking headaches and phantom taxable income on brokerage statements. The IRS confirms that “the limitations on capital losses, the wash sale rules, and certain other rules do not apply to traders using the mark-to-market method of accounting.”1Internal Revenue Service. Topic No. 429, Traders in Securities
Simpler Reporting, No Self-Employment Tax
You no longer track holding periods to split short-term from long-term. Everything is ordinary, reported on Part II of Form 4797 rather than Schedule D,3Internal Revenue Service. About Form 4797, Sales of Business Property with the net flowing to Schedule 1 of Form 1040.4Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income And trading gains from securities are not subject to self-employment tax, whether or not you’ve made the election. The IRS treats trading as managing your own capital rather than providing services to customers.1Internal Revenue Service. Topic No. 429, Traders in Securities
The Cost: Ordinary Rates on Gains
The election converts your gains to ordinary income, so you lose access to the preferential long-term capital gains rates. In practice, this rarely stings active traders. If you’re holding for days or weeks, your gains would be short-term and taxed at ordinary rates anyway. The election doesn’t change the rate on those gains; it changes the character of your losses from limited to unlimited.
How Year-End Valuation Works
Every open position is treated as sold at fair market value on the last business day of the tax year, whether you actually sold it or not. That deemed sale creates a taxable gain or loss. When the new year starts, your basis in each position resets to the deemed sale price, so the same gain or loss is never counted twice.
Keeping Some Positions on the Investment Side
The election doesn’t force every security you own into MTM. You can hold positions as investments and keep them out of the deemed sale, but you have to clearly identify them in your records on the day you acquire them. The IRS suggests keeping investment holdings in a separate brokerage account from your trading account.1Internal Revenue Service. Topic No. 429, Traders in Securities You cannot reclassify after the fact. Positions you didn’t designate as investments on acquisition day fall under the MTM election by default, and properly identified investment positions stay under normal capital gains rules, including the wash sale rule and the $3,000 loss cap.5Office of the Law Revision Counsel. 26 USC 475 – Mark to Market Accounting Method for Dealers in Securities
How and When to File the Election
The deadline is earlier than most traders expect, and missing it is the single most common way people lose the election for a full year. You must file a statement by the original due date, without extensions, of the tax return for the year before the election takes effect. To elect MTM for the 2026 tax year, you file the statement by April 15, 2026, attached to either your 2025 tax return or your extension request for that return.1Internal Revenue Service. Topic No. 429, Traders in Securities
Filing your prior-year return on extension in October doesn’t help. If nothing was attached by April 15, the election is gone for that year. The statement itself must include:
- That you are making an election under Section 475(f)
- The first tax year the election is effective
- The trade or business for which you are making the election (securities, commodities, or both)
New taxpayers who weren’t required to file a return for the prior year follow a different path: place the election statement in your books and records no later than two months and 15 days after the first day of the election year, then attach a copy to the return for that year.6Internal Revenue Service. Rev. Proc. 99-17
If you miss the April 15 deadline, there is no automatic remedy. The IRS does not grant leniency for late elections. You wait and file a timely election for the following year.
Business Expense Deductions Come With Trader Status
A related benefit sits alongside the election itself. Qualifying as a trader lets you deduct trading-related expenses on Schedule C as business costs, whether or not you elect MTM. That includes market data subscriptions, trading software, charting platforms, internet service allocable to the business, home office costs for space used exclusively for trading, and depreciation on computers and equipment. The investment interest expense limitation that binds investors does not apply to interest paid in connection with a trading business.7Internal Revenue Service. 2025 Publication 550
One thing you can’t deduct separately: commissions and other costs of buying or selling the securities. Those get folded into the gain or loss on each trade.
The Section 481(a) Adjustment in Year One
Switching to mark-to-market is a change in accounting method, which triggers a Section 481(a) adjustment in your first election year. If you were already holding securities when the election year began, those unrealized gains and losses are computed as if the positions had been marked to market on the last day of the prior year. The net adjustment is then spread ratably over four tax years, starting with the election year.6Internal Revenue Service. Rev. Proc. 99-17
If your account was entirely in cash at the start of the election year, the adjustment is zero. If you had large unrealized gains built up, the four-year spread softens the hit but doesn’t eliminate it. Traders sitting on significant appreciation sometimes time the election year to manage this.
Getting Out: Revoking the Election
The election is not one you can quietly abandon. Once made, it stays in effect until you take affirmative steps to revoke it. Revocation requires both a notification statement under Revenue Procedure 2025-23 and a Form 3115 (Application for Change in Accounting Method) to switch back to a realization method. The notification statement is due by the original due date, without extensions, of the return for the year before the revocation takes effect, the same timing pattern as the original election.1Internal Revenue Service. Topic No. 429, Traders in Securities
Revoking within five years of making the election means filing Form 3115 under the non-automatic change procedures, which require IRS approval and a user fee. Re-electing MTM within five years of a prior revocation runs into the same non-automatic procedures. The five-year friction exists to stop taxpayers from toggling the method on and off to pick favorable treatment year to year.
Commodities Traders
Section 475(f)(2) offers the same election to traders in commodities, with the same qualifying criteria, election procedures, and tax consequences. If you trade both securities and commodities, the elections are independent: you can elect for one, both, or neither, and the statement has to specify which trade or business it covers.5Office of the Law Revision Counsel. 26 USC 475 – Mark to Market Accounting Method for Dealers in Securities
Commodity gains already get mixed treatment under Section 1256 contracts through the 60/40 long-term/short-term split, so whether MTM helps depends on whether you’re trading Section 1256 contracts or physical commodities, and whether you expect net gains or net losses. The unlimited loss deduction is again the main reason to elect.
What About the QBI Deduction
Traders sometimes ask whether MTM trading income qualifies for the 20% qualified business income deduction under Section 199A. The answer is unsettled. The IRS excludes “investment items such as capital gains or losses” and “commodities transactions or foreign currency gains or losses” from QBI.8Internal Revenue Service. Qualified Business Income Deduction Because MTM converts trading gains and losses from capital to ordinary, an argument exists that the capital gains exclusion no longer applies to securities traders who elect. The commodities exclusion could still block commodity traders, and the IRS has not issued definitive guidance on MTM securities trading income. If you’re counting on QBI, get professional advice before filing.