Section 475(f) Mark-to-Market Election: Filing and Deadlines

The Section 475(f) mark-to-market election lets a qualifying trader in securities treat every position as sold at fair market value on the last business day of the year, converting all trading gains and losses into ordinary income or loss. It removes the $3,000 annual cap on capital loss deductions and switches off the wash sale rule for the trading business. The catch is timing: the election statement must be attached to the federal return for the year before the election takes effect, filed by that return’s original due date. Miss it by a day and you’re locked out for the entire year.¹

Who Can Make the Election

Only a trader in securities can elect under 475(f). The IRS treats trader status as a factual question, and it gets heavy scrutiny on audit. Investors, who buy and hold for dividends, interest, or long-term appreciation, are not eligible no matter how the account is labeled.²

Three factors carry the most weight because they’re the easiest for the IRS to verify. Volume: roughly 720 or more total transactions per year has held up in Tax Court, counting each open and close separately. Frequency: trades on close to 75 percent of available trading days, not clustered into bursts with long gaps. Holding period: an average above 31 days pushes you toward investor classification because long holds signal a buy-and-hold strategy rather than a short-term trading business.

Beyond the numbers, the IRS looks at how much time and effort you devote to the activity, and whether it resembles a full-time professional commitment. A full-time job elsewhere makes qualification harder. Income needs to come from price swings, not from dividends or interest. A portfolio generating substantial dividend income looks like an investment portfolio no matter how often you trade. The burden of proof sits entirely on you.

What the Election Actually Does

Under mark-to-market accounting, you treat every security in the trading business as if you sold it at fair market value on the last business day of the tax year. You recognize the resulting gain or loss immediately, even though you still hold the position, and the closing price becomes your new cost basis going into the next year.³

All gains and losses from the trading business become ordinary rather than capital. That changes the math when you have a losing year. Without the election, net capital losses above $3,000 ($1,500 if married filing separately) carry forward indefinitely, so a $100,000 trading loss would take more than 30 years to fully deduct against ordinary income.⁴ With the election, that entire $100,000 offsets wages, business profits, or any other ordinary income in the same year.

The trade-off is that net gains also become ordinary income, taxed at rates up to 37 percent for 2026 instead of the preferential long-term capital gains rates.⁵ For traders who hold positions for days or weeks, this cost is small because short-term capital gains are already taxed at ordinary rates. The election is most valuable for high-volume traders who expect net losses in some years, or who want to eliminate the compliance headache of tracking wash sales across thousands of transactions.

The wash sale rule normally disallows a loss when you sell a security and buy a substantially identical one within 30 days before or after the sale, adding the loss to the basis of the replacement.⁶ Section 475(d)(1) specifically exempts mark-to-market traders from this rule for securities held in the trading business.³

Securities you hold for investment are excluded from the mark-to-market calculation, but only if you identify and segregate them in your records on the same day you acquire them, such as by using a separate brokerage account.² Investment securities you fail to segregate on acquisition day get swept into the trading business and marked to market at year-end. The wash sale exemption also stops at that line: segregated investment holdings remain fully subject to wash sale treatment.

How and When to File

The election requires a written statement attached to your federal income tax return. The procedure depends on whether you’re an existing taxpayer or a newly formed entity.

Existing Taxpayers

To elect mark-to-market for a given tax year, attach a statement to the federal return for the immediately preceding year, filed by the original due date of that return, ignoring extensions. To elect for 2026, the statement goes on your 2025 return, due April 15, 2026. You can also attach the statement to a timely filed extension request for that preceding-year return.¹

The statement must include three things:

A clear statement that you are electing mark-to-market accounting under Section 475(f)
The specific first tax year the election will take effect
Identification of the trade or business to which the election applies (securities, commodities, or both)

Because this is a change in accounting method, you also file Form 3115, Application for Change in Accounting Method, under the automatic consent procedures. The IRS assigns this change number 64. Attach the original Form 3115 to your timely filed return for the election year and mail a signed copy to the IRS in Ogden, Utah.⁷

Form 3115 requires a Section 481(a) adjustment reconciling the difference between income reported under the old realization method and what you would have reported under mark-to-market. If the adjustment increases your income, meaning you had unrealized gains at the transition, you spread that increase over four tax years starting with the election year. If the adjustment decreases your income, you take the entire decrease in the first year the election is effective.

New Entities

A newly formed trading entity that has never been required to file a federal return gets a more flexible deadline. Place the election statement in the entity’s 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 entity’s original federal return for that year. A trading LLC formed in January 2026 would need the statement in its records by March 16, 2026, with a copy on the 2026 return.¹

The Deadline Is Absolute

Extensions of time to file the return do not extend the election deadline. If April 15 passes without the statement attached to the prior-year return or extension request, you cannot elect mark-to-market for the current year. You wait and file the election on next year’s return for the following tax year.

If You Missed the Deadline

Taxpayers who miss the filing window can request Section 9100 relief, an extension of time to make the election. The IRS looks at whether you acted reasonably and in good faith, and whether granting relief would prejudice the government’s interests. Relief is more likely if you apply before the IRS discovers the failure on its own. The IRS will deny relief if you were fully informed about the requirements and deliberately chose not to file, or if you’re using hindsight to cherry-pick a favorable outcome after seeing how the year played out.⁸

The government’s interests are considered prejudiced when the election involves an accounting method change requiring a Section 481(a) adjustment, which 475(f) does. That makes 9100 relief for this election difficult to obtain in practice. Calendar the deadline and treat it as unmovable.

Reporting on the Return

Mark-to-market gains and losses are reported on Form 4797, Sales of Business Property, not on Schedule D. Report realized trades and year-end mark-to-market adjustments on Part II, line 10, with an attached statement showing transaction details. Securities still held at year-end should be separately identified on that statement.⁹ The net figure from Form 4797 flows to Schedule 1 of Form 1040, line 4.¹⁰

Self-Employment Tax

Gains and losses from selling securities as a trader are not subject to self-employment tax, even when classified as ordinary income under mark-to-market.² Without the exemption, net gains would face an additional 15.3 percent in combined Social Security and Medicare taxes on top of regular income tax. The exemption covers only gains and losses from trading the securities themselves. Fees for managing other people’s money, advisory services, or teaching trading strategies are subject to self-employment tax in the normal way.¹¹

Commodities and Section 1256 Contracts

A parallel election under Section 475(f)(2) is available to commodities traders, and it works the same way. You can make the elections independently for each trading business, so a taxpayer who trades both stocks and commodity futures could elect for one, both, or neither.³

Regulated futures contracts, foreign currency contracts, and certain options normally receive the Section 1256 60/40 split: 60 percent long-term and 40 percent short-term regardless of holding period. When a commodity-referencing 1256 contract falls within a 475(f) commodities election, Section 475 overrides the 60/40 treatment and converts everything to ordinary. For securities traders, a statutory carve-out generally keeps 1256 contracts outside the definition of “security” for 475 purposes, so 60/40 treatment typically survives a securities-only election. Traders who actively use futures or options should model both outcomes before committing to the commodities election.

Revoking the Election

The statute says the election applies to the year it’s made and all subsequent years unless revoked with the consent of the IRS Commissioner.³ Revocation is possible, but the process depends on timing.

If more than five tax years have passed since you elected in, you can file Form 3115 under the automatic consent procedures (change number 218) to switch back to the realization method. Attach the form to your return for the year of change and send a copy to the IRS in Ogden, Utah. No user fee is required.¹²

To revoke within five years of making the election, use the non-automatic consent procedures. That means filing Form 3115 with the IRS Office of Chief Counsel in Washington, D.C., paying a user fee, and providing a detailed business reason for the change. The IRS must approve the request before it takes effect. Re-electing mark-to-market within five years of a prior revocation also requires non-automatic consent.⁷²

The election can also terminate involuntarily if trading activity drops below the level needed to qualify as a trader. You revert to investor status and file Form 3115 to change back to the realization method, becoming subject again to the wash sale rules and the $3,000 capital loss cap. Securities held at the transition must have their basis adjusted to reflect the switch out of mark-to-market accounting.

1
Internal Revenue Service. Rev. Proc. 99-17
2
Internal Revenue Service. Topic No. 429, Traders in Securities
3
Office of the Law Revision Counsel. 26 USC 475 – Mark to Market Accounting Method for Dealers in Securities
4
Internal Revenue Service. IRS Tax Tip 2003-29 Capital Gains and Losses
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. IRS Notice 2013-48
7
Internal Revenue Service. Where to File Form 3115
8
Internal Revenue Service. Private Letter Ruling 201043030
9
Internal Revenue Service. 2025 Instructions for Form 4797 – Sales of Business Property
10
Internal Revenue Service. 2025 Schedule 1 (Form 1040)
11
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
12
Internal Revenue Service. Rev. Proc. 2024-23