- Mark-to-Market (MTM) under IRC §475(f) is an election that lets qualifying active traders treat all gains and losses as ordinary income, not capital gains.
- For qualifying traders, MTM typically eliminates the $3,000 capital loss limit and eliminates wash sale rules on the elected positions — turning losing years into fully deductible ordinary losses.
- Eligibility typically requires Trader Tax Status (TTS) — substantial and continuous trading activity with profit intent. Investors and casual traders generally do not qualify.
- The election is typically irrevocable and has a strict timing requirement — for most filers the election must be made by the April 15 deadline of the year you want it to apply. Missing the window typically means waiting until the following tax year.
- MTM is high-stakes — beneficial for some traders, costly for others (e.g. traders sitting on large unrealized gains at year-end). A CPA who specializes in trader taxation should model the math before electing.
The One Big Beautiful Bill Act (OBBBA, signed July 2025) made two changes that typically make the §475 election more attractive for qualifying traders starting in tax year 2026:
- §475 ordinary losses are now exempt from wash-sale and capital-loss limits. Traders who elected MTM can typically deduct full trading losses against ordinary income without the $3,000 cap.
- §475 ordinary income is now QBI-eligible under §199A. Combined with OBBBA making §199A permanent, this typically unlocks a 20% deduction layer that prior law denied to many active traders.
Every situation varies — a CPA who specializes in trader taxation models whether MTM makes sense for a particular trader's mix of trading instruments, entity structure, and unrealized year-end positions.
Mark-to-market (MTM) is the single most powerful tax election available to active traders. Most traders have never heard of it. Those who use it — and qualify correctly — can eliminate the $3,000 capital loss limit, avoid wash sale rules, and convert trading losses into full ordinary deductions.
This is not a loophole. It's a legitimate IRS-sanctioned election under Internal Revenue Code Section 475(f), and it's been available to qualifying traders for decades.
Under MTM, you treat all open trading positions as if they were sold on December 31 at fair market value. All gains and losses become ordinary income/loss — not capital. This eliminates the $3,000 annual cap on capital loss deductions and removes the wash sale rule entirely.
How Mark-to-Market Works
Under standard capital gains rules, you recognize a gain or loss when you close a position. Under MTM, you recognize gains and losses on December 31 of each year — whether you've closed the position or not.
The practical effect:
- All gains are ordinary income (taxed at your marginal rate — can be higher than long-term capital gains rate)
- All losses are ordinary losses — fully deductible with no $3,000 cap
- Wash sale rules no longer apply — you can trade the same securities without worrying about disallowed losses
- Open positions are "marked" to their December 31 value as if sold
Who Benefits from the MTM Election?
| Trader Type | MTM Benefit | Worth Electing? |
|---|---|---|
| Trader with large losses | Full deduction vs $3K cap | Almost always yes |
| Trader with wash sale issues | Wash sales eliminated | Yes |
| Consistently profitable trader | Loses long-term cap gains rate | Usually no — short-term only anyway |
| Mixed long/short term portfolio | Loses LTCG rate on longs | Likely not — analyze carefully |
| High-frequency day trader | Simplifies — all short-term anyway | Often yes |
| Futures trader (§1256) | §1256 is already advantaged | Can still help with losses |
MTM converts all gains to ordinary income. If you hold any long-term positions that would otherwise qualify for the 0%, 15%, or 20% long-term capital gains rate, electing MTM means those gains are taxed at ordinary income rates instead. Analyze your full trading portfolio before electing.
Who Qualifies for the MTM Election?
Qualification is typically required for Trader Tax Status (TTS) before you can make the MTM election. The IRS requires you to trade as a business — with regularity, frequency, and continuity throughout the year.
Generally, this means:
- Substantial trading volume — courts have generally looked for 720+ trades per year
- Holding periods of days, hours, or minutes — not months or years
- Consistent trading throughout the year, not just in a few weeks
- Trading as your primary activity or a significant business activity
- Profit motive from short-term price movements, not dividends
The MTM Election Deadline — The Most Critical Rule
This is where most traders miss out: the MTM election must be filed by the due date (including extensions) of the prior year's tax return.
To have MTM in effect for the 2026 tax year, most traders typically file the election by:
- April 15, 2026 (regular deadline) — attached to your 2025 tax return
- October 15, 2026 — if you file a 2025 extension
If you miss this window, you cannot elect MTM for 2026. You must wait until 2027. This is one of the most expensive missed deadlines in trader taxation.
The MTM election is not made on your current year return. It's made on your prior year return (or extension). Many traders discover MTM in December after a bad year — and learn they've already missed the deadline for that tax year. Contact a CPA now, not in April.
How to File the MTM Election
- Confirm you qualify for Trader Tax Status — document your trading frequency and volume
- Prepare a written statement that includes: your name, TIN, the tax year the election is effective for, and that you're making the §475(f) election
- Attach the statement to your prior year tax return (or amended return if within the extension deadline)
- Keep a copy for your records — the IRS may challenge TTS status in an audit
What Happens After You Elect MTM?
Once elected, MTM is in effect for all future years unless you request IRS permission to revoke it (which requires a private letter ruling — expensive and time-consuming). You're committing to this accounting method going forward, so the election should be made thoughtfully.
Accounting Under MTM
Each December 31, you "mark" all open positions to their fair market value. Any unrealized gain or loss is recognized as if the position was sold. When you close the position in the following year, only the difference from the December 31 value (not the original cost basis) is recognized.
This adds complexity to your bookkeeping. You'll need detailed records of all open positions at year-end and their market values. This is another reason a specialized CPA is essential for MTM traders.
MTM and Net Operating Losses (NOL)
One of the most powerful benefits of MTM: if your trading losses exceed your total income in a year, you have a Net Operating Loss (NOL). NOLs can be carried forward to offset income in future profitable years — potentially deferring taxes for years or even decades.
Example: MTM trader loses $80,000 in 2026. Total income from all sources is $60,000. The trader has a $20,000 NOL that carries forward. In 2027, the trader earns $100,000 in trading profit — but the $20,000 NOL reduces taxable income to $80,000.
Frequently Asked Questions
What is the mark-to-market election for traders?
The mark-to-market election under IRC Section 475 allows qualifying traders to treat all trading gains and losses as ordinary income rather than capital gains, eliminating the $3,000 capital loss cap and wash sale rules.
When must the mark-to-market election be filed?
The MTM election must be filed by the due date of your prior year tax return, including extensions. To elect MTM for 2026, most traders typically file by April 15, 2026 (or October 15, 2026 with extension).
Who qualifies for mark-to-market accounting?
Traders who qualify for Trader Tax Status — generally those making 720 or more trades per year with short holding periods and consistent trading activity throughout the year.
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Get My Free Tax Snapshot →MTM only makes sense alongside Trader Tax Status, entity structure, and an honest read of your wash-sale exposure. These are the most relevant adjacent topics: