Mark to Market Election for Day Traders
The mark to market election under Section 475(f) of the Internal Revenue Code lets qualifying day traders treat all open positions as if they were sold at fair market value on the last business day of the year. This means you report all gains and losses as ordinary income rather than capital gains, which unlocks some major tax advantages, including the ability to deduct trading losses without the usual $3,000 annual cap.
What Is the Section 475 Mark to Market Election?
Under normal tax rules, traders report gains and losses as capital gains. That means you’re subject to the wash sale rule, and net capital losses are capped at $3,000 per year against ordinary income. The rest carries forward, sometimes for years.
The Section 475 mark to market election changes the game. When you elect MTM status, every position you hold at year end is treated as though you sold and immediately repurchased it at the closing price on December 31. All your gains and losses become ordinary, and the wash sale rule no longer applies to your trading activity.
This is particularly valuable for active day traders who open and close dozens or hundreds of positions daily. A bad year without the MTM election could leave you carrying forward huge capital losses with no way to use them fully. With MTM, those losses offset your other ordinary income dollar for dollar.
Who Qualifies and How to Elect
The IRS doesn’t have a bright-line test for “trader tax status,” but they look at several factors: how frequently you trade, whether trading is your primary income source, how much time you spend, and whether you’re seeking short-term profits rather than long-term appreciation.
To make the election, you must file IRS Form 3115 (Application for Change in Accounting Method) and attach a statement to your tax return. The critical deadline is April 15 of the tax year you want the election to apply. If you want MTM treatment for 2025, you must elect by April 15, 2025. You cannot make this election retroactively.
Once you make the election, it stays in effect for all future tax years unless you get IRS approval to revoke it. Think carefully before committing because reversing it requires filing another Form 3115.
Pros and Cons of the MTM Election
Benefits:
- No wash sale rule restrictions
- Unlimited loss deductions against ordinary income
- Simpler record keeping for active traders
- Losses from a bad year provide immediate tax relief
Drawbacks:
- You lose access to favorable long-term capital gains rates on trading positions
- Year-end unrealized gains become taxable, even if you haven’t sold
- The election is difficult to revoke
- You must maintain trader tax status every year
For most casual or part-time traders, the MTM election isn’t worth it. But if you’re trading full-time with hundreds of trades per year, the ability to fully deduct losses is a significant advantage. Consider consulting a trading tax accountant who specializes in trader tax status.
Key Takeaways
- The mark to market election (Section 475) converts trading gains and losses to ordinary income, removing the $3,000 loss cap
- The wash sale rule does not apply to MTM-elected traders
- You must elect by April 15 of the year you want it to take effect
- The election is sticky: revoking it requires IRS permission
- It’s best suited for full-time, high-frequency traders who qualify for trader tax status
Frequently Asked Questions
Can I make the mark to market election if I trade part-time? Technically, the election is available to anyone who qualifies for trader tax status. But part-time traders often struggle to meet the IRS criteria for frequency and regularity. If trading isn’t your primary activity, you may not qualify.
Does the MTM election apply to my investment portfolio too? No. You can (and should) clearly separate your trading accounts from your investment accounts. The MTM election applies only to securities or commodities used in your trading business, not your long-term investments.
What happens if I have a profitable year under MTM? All profits are taxed as ordinary income at your marginal tax rate, which could be higher than the long-term capital gains rate. That’s the trade-off for unlimited loss deductions.
Risk Disclaimer: Trading involves substantial risk of loss. Past performance is not indicative of future results. See our full risk disclaimer.