Mark-to-Market (MTM) Election: Pros, Cons, and the April 15 Deadline

Section 475(f) mark-to-market is the most consequential election a US trader can make. Done right it removes the wash-sale rule and the $3,000 ordinary-loss cap. Done wrong it taxes every long-term holding at ordinary rates forever.

What MTM Does

• Converts all gains and losses on covered securities to ordinary income/loss.
• At year-end, every open position is deemed sold at fair market value and reopened at that price.
• Eliminates the wash-sale rule for covered securities.
• Removes the $3,000 capital-loss limitation — unlimited ordinary loss deduction against all income.

Eligibility

Only a trader qualifying for Trader Tax Status may elect. Investors cannot. The election covers securities (Section 475(f)(1)) or commodities (475(f)(2)) — file separately for each.

The Deadline Trap

• Existing trader: must file a statement of election by April 15 of the tax year you want it to apply (the original due date, not extended).
• New trader: must elect by the original due date of the prior year's return — meaning you elect before you begin trading in earnest.

A late election requires a private letter ruling from the IRS — expensive ($3,000+ user fee) and not guaranteed.

Pros

1. Unlimited loss deduction in a bad year — full ordinary deduction against wages and other income.
2. No wash sales — harvest losses freely without substitute-security gymnastics.
3. Simplified accounting — year-end true-up, no carrying disallowed losses forward.
4. Losses are not subject to capital-loss carryback/carryforward limits.

Cons

1. No long-term capital gains — even a position held two years is ordinary income, taxed up to 37% instead of 20%.
2. Year-end MTM gain acceleration — unrealized profits on December 31 are taxed now, requiring cash for tax before realization.
3. Section 163(j) interest limitation can cap business interest and related expense deductions.
4. State conformity varies — California does not conform to federal 475, creating dual bookkeeping.
5. Binding without revocation unless you file a formal (and time-limited) revocation.

Decision Framework

Elect MTM when your strategy is high-frequency, short-holding, loss-heavy, and tax-rate-insensitive (you are already in the top bracket, so ordinary vs long-term rarely matters). Skip it if you hold swing positions that would otherwise qualify for long-term rates.

Action Points

1. Model three years of your actual trades under both regimes before electing.
2. Calendar the April 15 election deadline — it is unforgiving.
3. Confirm state conformity; if non-conforming, budget for parallel accounting.
4. Keep a written trading plan demonstrating TTS — MTM without TTS is invalid and disallowed retroactively.

MTM is a one-way door. Treat the election as permanent and model its cost across a full market cycle, not a single year.