Okay, let’s talk about the most powerful—and most misunderstood—tax tool available to serious day traders: the Mark-to-Market (MTM) election under Section 475(f). If you’ve qualified for Trader Tax Status (TTS), this is the next level. Think of it as upgrading your tax engine from a standard sedan to a race car.
For traders stuck in the default “investor” status, taxes are a minefield of wash sales and crippling loss limitations. MTM accounting, when properly elected, sweeps those problems away. But—and this is critical—it comes with significant trade-offs and a commitment you can’t easily undo.
Our team uses MTM because, for our high-volume, short-term style, the benefits are undeniable. In this guide, we’ll break down exactly what mark-to-market trading means, the game-changing pros, the serious cons, and the precise steps you need to take to make the election (including a deadline you absolutely cannot miss).
What is Mark-to-Market (MTM) Accounting for Traders?
At its core, Mark-to-Market is a method of accounting. Instead of recognizing gains and losses only when you sell a security (the “realization” method), MTM recognizes them at the end of the year, even on open positions.
The Year-End “Fictional Sale” Explained
Under Section 475(f), if you hold trading securities at the end of the tax year (December 31st), you treat them as if you sold them for their fair market value (FMV) on the last business day. You then immediately “buy them back” at that same FMV price to start the new year.
This “fictional sale” forces you to recognize all your unrealized gains and losses for the year. Your profit or loss for the year becomes the sum of your realized gains/losses plus these unrealized MTM gains/losses.
The Conversion: Capital Gains/Losses Become Ordinary Income/Loss
Here’s the most crucial part: Making the MTM election changes the character of your trading gains and losses. They are no longer capital gains and losses. Instead, they become ordinary income and ordinary losses.
This single change has massive tax implications, leading directly to the biggest benefits of MTM.
The Critical Prerequisite: You MUST Have Trader Tax Status (TTS) First
Before we dive into the benefits, let’s be absolutely clear: You cannot just decide to use MTM. The Section 475(f) election is only available to taxpayers who have already qualified for Trader Tax Status (TTS).
TTS is the IRS classification recognizing you as being in the “trade or business of trading securities.” It’s based on your substantial, regular, and continuous trading activity. If you haven’t met those requirements, MTM is off the table.
If you haven’t qualified for TTS, read our TTS Guide first.
The Game-Changing Benefits of the MTM Election
Why would anyone choose to pay tax on unrealized gains? Because the benefits for an active trader are enormous.
Benefit 1: The Wash Sale Rule Becomes Irrelevant
This is, frankly, the #1 reason most active stock and options traders elect MTM. The wash sale rule (which disallows losses if you repurchase a substantially identical security within 30 days) applies only to capital assets. Because MTM converts your trading securities to ordinary assets, the wash sale rule simply does not apply to your MTM trades.
You can sell a stock for a loss, buy it back immediately, and still claim the full loss in the current year. This alone can save traders from disastrous “phantom income” tax bills.
Benefit 2: The $3,000 Capital Loss Limitation is Eliminated
The other major handcuff for investors is the $3,000 limit on deducting net capital losses against ordinary income. If you have a bad year and rack up $50,000 in trading losses, as an investor, you can only use $3,000 of it to reduce your other income.
Under MTM, your losses are ordinary losses. There is no $3,000 limit. Your MTM trading losses can offset all your other ordinary income (W-2 salary, business income, interest income, etc.) without limitation (subject only to potential Excess Business Loss rules). This provides invaluable “tax loss insurance.”
Benefit 3: Simpler Year-End Accounting (No Lot Tracking)
While not a direct tax saving, MTM simplifies record-keeping. Because all positions are marked-to-market at year-end, you don’t need to meticulously track specific tax lots (e.g., FIFO, LIFO). Your gain or loss is based on the year’s overall change in value.
The Significant Drawbacks You MUST Consider
MTM isn’t all upside. There are serious consequences to consider before making the election.
Drawback 1: All Gains Are Taxed as Ordinary Income (No Long-Term Rates)
This is the big trade-off. Just as your losses become ordinary, so do your gains. You completely lose the ability to benefit from lower long-term capital gains tax rates (0%, 15%, or 20%) on any trading positions held for over a year.
For a pure day trader who never holds longer than a few hours or days, this might not matter—your gains would be short-term (taxed at ordinary rates) anyway. But if you’re a swing trader, or sometimes hold positions for months or years, MTM can result in a significantly higher tax bill on your winning trades.
Drawback 2: The Election is Hard to Revoke (The 5-Year Lock-In)
This isn’t a decision you can easily undo. Once you make the Section 475(f) election, it applies to that tax year and all future years unless you get IRS permission to revoke it.
Getting that permission is now harder and potentially expensive. According to recent IRS guidance (Rev. Proc. 2025-23), if you want to revoke the election within the first five years of making it, you must use the “non-automatic change procedure.” This requires:
- Filing a formal request (Form 3115 under non-automatic procedures).
- Getting explicit IRS consent.
- Paying a hefty IRS user fee (currently $13,225 as of 2025).
Only after five years can you revoke the election using the simpler “automatic change procedure,” which doesn’t require pre-approval or a user fee. This 5-year lock-in makes the initial decision much more critical.
How to Make the Section 475(f) Election: The Exact Process
Making a valid MTM election involves a strict, two-step process with deadlines that cannot be missed.
Step 1: The Election Statement (The Deadline You Can’t Miss!)
This is the most critical step. For an existing taxpayer (someone who filed a return last year):
- Deadline: You must file a specific election statement by the original due date (without extensions) of the tax return for the year prior to the year the election is to become effective.
- Example: To make the MTM election effective for the 2025 tax year, you must file the statement by April 15, 2025. Missing this date means you generally have to wait until the next year.
- How to File: You attach this statement either to your prior year’s timely filed tax return (e.g., attach to your 2024 return filed by April 15, 2025) OR to a timely filed request for an extension for that prior year’s return (e.g., attach to Form 4868 filed by April 15, 2025).
- Statement Content: The statement must include:
- That you’re making an election under Section 475(f).
- The first tax year the election is effective (e.g., “effective for the taxable year beginning January 1, 2025”).
- The trade or business for which the election is being made.
Step 2: Filing Form 3115 (The Accounting Method Change)
Making the election statement is step one. Step two formally changes your accounting method with the IRS.
- You must file Form 3115, Application for Change in Accounting Method, with your tax return for the first year the MTM election is effective.
- Example: If your election is effective for 2025, you file Form 3115 with your 2025 tax return (filed in 2026).
- You follow the “automatic change” procedures outlined in the Form 3115 instructions. This generally involves attaching the original Form 3115 to your return and sending a signed copy to the IRS National Office by the time you file the return.
The “New Entity Loophole”: A Special Deadline for Startups
There’s a crucial exception to the April 15 deadline that provides significant flexibility. If you are a new taxpayer—meaning you weren’t required to file a tax return for the prior year (like a newly formed LLC or S-Corp)—you have a different deadline:
- Deadline: You must make the MTM election by placing the required statement in the entity’s books and records no later than 2 months and 15 days (75 days) after the first day of the entity’s first tax year.
- How to File: You make this election internally (e.g., documented in company minutes). You then attach a copy of that internal election statement to the entity’s first timely filed tax return.
This allows a trader who missed the April 15 deadline for their individual account to potentially form a new entity later in the year, fund it, and still elect MTM for that entity’s trading activity within the 75-day window.
Revoking the MTM Election: Why It’s Harder Now
As mentioned, getting out of MTM isn’t simple.
- Within 5 Years: You need IRS permission via the non-automatic Form 3115 process, plus the user fee.
- After 5 Years: You can use the automatic Form 3115 process (no fee, no pre-approval).
- Revocation Deadline: Similar to making the election, the request to revoke (either the notification statement for automatic or the Form 3115 for non-automatic) must generally be filed by the original due date of the return for the year before the revocation is to take effect.
Suspending MTM by Failing TTS (A Risky Strategy)
Some sources suggest a workaround: intentionally stop trading enough to fail the TTS qualification tests. Since TTS is required for MTM, failing TTS effectively suspends MTM for that year without a formal revocation. If you requalify for TTS later, MTM automatically applies again.
Our Team’s Warning: This is risky. You lose your business expense deductions when you lose TTS. It also creates complex accounting if you suspend mid-year. Formal revocation, while potentially costly, is cleaner.
Mark-to-Market vs. Capital Gains: Who Should Elect MTM?
So, should you make the MTM election? It depends entirely on your trading style and long-term plans.
Ideal For:
- Active Day Traders (Stocks/Options) with TTS: If you primarily day trade stocks or options, qualify for TTS, and rarely hold positions overnight (let alone for a year), MTM is almost always beneficial. Your gains are likely short-term anyway, and the wash sale/loss limit relief is invaluable.
- Traders Expecting Large Losses: If you anticipate significant losses (e.g., starting a new, risky strategy), MTM provides “tax loss insurance” by allowing you to deduct those losses fully against other income.
Avoid If:
- Swing Traders Holding > 1 Year: If your strategy involves holding winners for over 12 months to get long-term capital gains rates, MTM is detrimental. It converts those potential low-tax gains into high-tax ordinary income. Does your strategy involve longer holds? Compare Day Trading vs. Swing Trading.
- Traders Relying on Long-Term Capital Gains Rates: Even if you don’t always hold >1 year, if a significant portion of your profits comes from positions held long enough to qualify for lower rates, MTM will increase your overall tax burden.
- Traders Unsure About Meeting TTS Long-Term: Given the 5-year lock-in, if you aren’t confident you can consistently meet the demanding TTS requirements year after year, electing MTM could trap you in an unfavorable tax situation if you later revert to “investor” status but can’t easily revoke MTM.
Our Team’s Verdict: MTM is Powerful, But Requires Commitment
The Section 475(f) Mark-to-Market election is arguably the most potent tax tool available to qualifying day traders. It solves the biggest tax headaches—wash sales and loss limits—that plague active traders using the default capital gains method.
However, the conversion of all gains to ordinary income and the difficulty of revocation (especially within the first five years) mean it’s not a decision to be taken lightly. You must be certain that your trading style fits the MTM profile and that you’re committed to maintaining TTS qualification for the long haul. Always consult with a CPA specializing in trader taxation before making the election.
See how MTM fits into the bigger picture in our Ultimate Guide to Day Trading Taxes. Understanding the Wash Sale Rule is absolutely key to appreciating why MTM is so valuable.
Frequently Asked Questions (FAQ) About Mark-to-Market Trading
What are the benefits of mark-to-market trading?
Quick Answer: The two main benefits are avoiding the wash sale rule and bypassing the $3,000 capital loss limitation.
Electing MTM under Section 475(f) converts your trading gains/losses from capital to ordinary. This means: 1) The wash sale rule no longer applies to your MTM trades, allowing you to claim losses even if you immediately repurchase the security. 2) Ordinary losses are not subject to the $3,000 annual deduction limit against other income; they can offset an unlimited amount of ordinary income.
Key Takeaway: MTM provides significant relief from the most restrictive tax rules faced by active traders using the default capital gains method.
Does MTM election avoid the wash sale rule?
Quick Answer: Yes, absolutely.
The wash sale rule specifically applies to losses on the sale of capital assets (like stocks treated under the default investor rules). The Section 475(f) MTM election changes the character of your trading securities to ordinary assets. Therefore, the wash sale rule, by definition, does not apply to securities accounted for under a valid MTM election.
Key Takeaway: Eliminating wash sale complications is a primary reason active stock and options traders elect MTM.
Who should elect MTM?
Quick Answer: Active day traders who qualify for Trader Tax Status (TTS), generate mostly short-term gains, and want to avoid wash sales and loss limits.
MTM is best suited for traders whose activity aligns with the “ordinary income” treatment. If you rarely hold positions long enough to qualify for long-term capital gains rates anyway, the main drawback (losing those lower rates) doesn’t significantly impact you. The benefits of avoiding wash sales and fully deducting losses often outweigh the loss of potential long-term capital gains treatment for high-frequency traders.
Key Takeaway: Evaluate your holding periods and tax situation; MTM is ideal for short-term traders but detrimental for those relying on long-term capital gains.
Can I elect MTM without trader tax status?
Quick Answer: No. You absolutely must qualify for Trader Tax Status (TTS) first.
The Internal Revenue Code Section 475(f) explicitly states that the election is available only to a “person who is engaged in a trade or business as a trader in securities”. Qualifying for TTS is the IRS’s way of recognizing you are engaged in that trade or business. If you don’t meet the TTS criteria, you are considered an “investor,” and investors cannot elect MTM.
Key Takeaway: TTS qualification is the non-negotiable first step before MTM can even be considered.
What is the deadline for Section 475(f) election?
Quick Answer: For existing taxpayers, it’s the original due date (usually April 15th) of the prior year’s tax return for the election to be effective in the current year. New entities have 75 days from inception.
An existing individual wanting MTM for 2025 must file the election statement by April 15, 2025, attached to their 2024 return or extension request. A newly formed LLC starting business on June 1, 2025, must make the election internally by mid-August 2025 (75 days later). Missing these deadlines generally means waiting until the next tax year.
Key Takeaway: The MTM deadline is strict and prospective—you cannot elect it retroactively for a year that has already ended.
How do I revoke a mark-to-market election?
Quick Answer: It’s complex. Revoking within 5 years requires IRS permission and a fee. After 5 years, it’s an automatic process.
To revoke MTM, you generally need to file Form 3115. If it’s within the first 5 years of electing, you must use the non-automatic procedure, which requires IRS pre-approval and a user fee (currently over $13,000). If it’s after 5 years, you can use the automatic change procedure (no fee, no pre-approval) by filing a notification statement by the prior year’s tax deadline and attaching Form 3115 to the year-of-change return.
Key Takeaway: MTM is a sticky election; plan carefully as getting out can be difficult and costly, especially early on.
Are MTM gains ordinary income?
Quick Answer: Yes. Both gains and losses under MTM are treated as ordinary income or loss.
The Section 475(f) election fundamentally changes the character of your trading results. Instead of being capital gains (eligible for potentially lower long-term rates) or capital losses (subject to the $3k limit), they become ordinary income (taxed at your regular rates) and ordinary losses (fully deductible against other income).
Key Takeaway: This conversion is the source of both MTM’s main benefit (ordinary losses) and its main drawback (ordinary gains).
Does MTM avoid the $3,000 capital loss limit?
Quick Answer: Yes, because MTM losses are ordinary losses, not capital losses.
The $3,000 annual limit applies only to net capital losses deducted against ordinary income. Since a valid MTM election converts trading losses into ordinary losses, they are not subject to this capital loss limitation. They can be used to offset any amount of other ordinary income (like wages, interest, etc.), subject only to potential Excess Business Loss limitations for very large losses.
Key Takeaway: Full deductibility of losses (“tax loss insurance”) is a major advantage of the MTM election.
Article Sources
- IRS.gov – Topic No. 429, Traders in Securities
- IRS.gov – Instructions for Form 3115, Application for Change in Accounting Method
- IRS.gov – Revenue Procedure 99-17 (Guidance on Sec 475(f) election): (Referenced in PLR 201623005 and Topic 429 – Establishes new taxpayer rule)
- Green Trader Tax – New IRS Rules: Section 475 MTM Revocation Now Locked for 5 Years
- Corvee – Mark-to-Market IRS Election Scenarios
- Databento – What is a mark-to-market election?
