IRC §475 Mark-to-Market Trader Tax Playbook: Election, Wash Sales, and the December 31 Mark

The December 31 problem

A trader who closes the year with open positions faces a question an investor never answers: what are those positions worth right now? Under the normal realization rules, gains and losses count only when a position is sold. Under §475(f), every trading security is treated as sold at fair market value on the last business day of the year. Unrealized losses become deductible now, wash-sale deferrals disappear, the $3,000 annual capital loss cap stops applying, and every trading gain becomes ordinary income.

Trader or investor

The §475(f) election is open only to a trader, never to an investor. IRS Topic 429 states the test as three conditions that must all be met: you must seek to profit from daily market movements in the prices of securities and not from dividends, interest, or capital appreciation; your activity must be substantial; and you must carry on the activity with continuity and regularity. The IRS weighs holding periods, trade frequency and dollar volume, livelihood dependence, and time devoted. Topic 429 is blunt: calling yourself a trader does not make you one for tax purposes. A trader can hold other securities for investment, but the trader rules do not apply to them; keep them in a separate brokerage account, identified on the day acquired.

What §475(f) does

Section 475 began as a dealer rule; subsections (e) and (f), added in 1997, extended the same treatment by election to traders. Section 475(f)(1)(A) reads: a person engaged in a trade or business as a trader in securities who elects to have the paragraph apply "shall recognize gain or loss on any security held in connection with such trade or business at the close of any taxable year as if such security were sold for its fair market value on the last business day of such taxable year, and any gain or loss shall be taken into account for such taxable year." Basis is then adjusted so the same dollars are not taxed twice. First, §475(d)(3)(A) gives the marked gain or loss ordinary character: "Any gain or loss with respect to a security under subsection (a)(2) shall be treated as ordinary income or loss." Second, §475(d)(1) switches off the wash-sale rule for marked securities: "section 1091 shall not apply (and section 1092 shall apply) to any loss recognized under subsection (a)."

What gets marked and what stays out

Section 475(c)(2) defines "security" broadly: stock, partnership and trust interests, debt instruments, notional principal contracts, and derivatives in any of those items, including options, forwards, and short positions. Under §475(f)(1)(B), a security escapes the mark only if it has no connection to the trader's activities and is identified in records before the close of the day acquired. Identification after the fact does not work.

Making the election

Rev. Proc. 99-17 provides the "exclusive procedure" for the §475(e) or (f) election. The election needs no consent from the Secretary — §475(f)(3) — and applies to the election year and all later years unless revoked with consent. For an election effective for a taxable year beginning on or after January 1, 1999, Rev. Proc. 99-17 §5.03(1) requires the trader to file a statement satisfying §5.04 no later than the due date, without regard to extensions, of the original return for the year immediately preceding the election year, attached either to that return or to a request for an extension of time to file it. The statement must name the election, the first tax year, and the trade or business. For a calendar-year trader, the statement for a 2027 election is due April 15, 2027 — a Thursday — the due date of the 2026 return, extensions ignored. A new taxpayer with no prior-year return places the statement in books and records by March 16, 2027 — 2 months and 15 days after January 1, 2027 — and attaches a copy to the 2027 return. Topic 429 states that if the trader's previous method was anything other than mark-to-market, the trader "must change [the] method under Revenue Procedure 2025-23, Section 24.01, by filing a Form 3115, Application for Change in Accounting Method." The Form 3115 carries the §481(a) adjustment that prevents amounts from being duplicated or omitted.

The wash-sale interaction

Under §1091, a loss on a sale is disallowed if substantially identical stock or securities are bought within 30 days before or after the sale. IRS Publication 550 states the rule plainly: "A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you buy substantially identical stock or securities," acquire them in a fully taxable trade, acquire a contract or option to buy them, or acquire them for an IRA or Roth IRA. The disallowed loss is added to the basis of the new stock. The §475(f) election removes that pile: §475(d)(1) provides that §1091 "shall not apply to any loss recognized under subsection (a)," and Topic 429 states the result directly — "The limitations on capital losses, the wash sale rules, and certain other rules do not apply to traders using the mark-to-market method of accounting." Losses that would have been deferred under §1091 are recognized in the year they occur. The exemption covers only trading-business securities, not excluded investment securities or IRA positions. For the full wash-sale mechanics outside the election, see our Tax-Loss Harvesting, Wash Sale & Capital Gains Playbook.

Ordinary treatment and the $3,000 cap

Without the election, gains and losses are capital, reported on Schedule D and Form 8949, and the §1211(b) limit applies. Publication 550 puts the limit in numbers: the allowable capital loss deduction on Schedule D is the lesser of "$3,000 ($1,500 if you are married and file a separate return), or your total net loss as shown on line 16 of Schedule D." Publication 550's example: Bob and Shelly lost $7,000 in 2025, deducted $3,000, and carried $4,000 to 2026. With the election, the same loss is ordinary, reported on Part II of Form 4797, and the $3,000 cap never engages. The trade-off is symmetric — gains are ordinary too, so the preferential long-term capital gains rates are gone. Trading gains are generally short-term anyway, so the rate cost is usually small. A trader's business expenses — data feeds, platform fees, research, home office — are deductible on Schedule C. Topic 429 puts business expenses on Schedule C; commissions adjust gain or loss instead. And trading gains and losses are not subject to self-employment tax: Topic 429 states that "gains and losses from selling securities from being a trader aren't subject to self-employment tax," per §475(f)(1)(D) and §1402. Model your quarterly payments with our free Self-Employed Tax & Quarterly Estimator.

Entity and filing: LLC, S-Corp, EIN, CPA

Most individual traders file as sole proprietors, reporting the business on Schedule C under their Social Security Number. A trader who forms a single-member LLC obtains an Employer Identification Number (EIN) from the IRS and files the same Schedule C. An S-Corp election is different from the §475 election: an S-Corp pays the trader a salary, files Form 1120-S, and elects at the entity level, while a C-Corp files Form 1120. Whatever the entity, the election statement, the Form 3115, and the year-end mark all need a CPA review before filing, because a defective election is treated as no election at all. Brokerage Form 1099-B reporting does not change when a trader elects, so the return must reconcile the broker's numbers to the marked numbers on Form 4797. A nonresident trader who files with an ITIN instead of an SSN faces the same election rules.

Worked example: one trading year, two tax outcomes

Take Dana, a calendar-year trader who qualifies under Topic 429 and elects §475(f) effective for 2026; her election statement was attached to her 2025 return, filed by April 15, 2026 — a Wednesday — meeting the Rev. Proc. 99-17 deadline. Her 2026 year, at a 24% marginal rate for both treatments:

• Realized trading gains in 2026: $58,000. Realized trading losses: $34,000.
• Of those losses, $9,000 would be disallowed under §1091 because Dana repurchased substantially identical securities within 30 days.
• Open positions at December 31, 2026 (a Thursday, the last business day of the year): cost basis $180,000, fair market value $165,000 — an unrealized loss of $15,000.
• Schedule C business expenses (data feeds, platform, research): $12,000.

The 2026 swing is $8,640: the investor defers $24,000 of losses and cannot deduct $12,000 of expenses.

The election did not create $8,640 of free money; it pulled $24,000 of losses into 2026 and made $12,000 of expenses deductible. If her open positions had shown a $15,000 unrealized gain instead, the election would have taxed it in 2026. That asymmetry is the decision.

Revocation: easy to enter, hard to leave

The election runs until revoked with consent. Topic 429 describes the exit: a notification statement under Rev. Proc. 2025-23 §24.02 plus a Form 3115 changing the method back to realization. The notification statement is due by the due date, not including extensions, of the prior year's return — the same April 15 discipline. Late revocations are generally not allowed. A five-year rule sharpens the exit: revoking within five years means filing Form 3115 under the non-automatic procedures of Rev. Proc. 2015-13, which require a user fee, and the same route applies to a new election within five years of a revocation. Treat the election as a multi-year commitment, not a one-year tactic. For the separate §199A QBI analysis, see our Section 199A QBI Deduction & SSTB Phaseout Playbook.

Execution checklist: electing §475(f) for 2027

1. Confirm trader status under the Topic 429 three-condition test and document the facts.
2. Move investment securities to a separate brokerage account, identified on the day acquired.
3. Pick the entity posture — sole proprietor, LLC with an EIN, or S-Corp — and have a CPA confirm the fit.
4. Draft the Rev. Proc. 99-17 §5.04 statement: election, first tax year (2027), trade or business.
5. Attach the statement to your 2026 return or Form 4868 request by April 15, 2027; the October extension date does not count.
6. New taxpayers: place the statement in books and records by March 16, 2027 and attach a copy to the 2027 return.
7. File Form 3115 under Rev. Proc. 2025-23 §24.01, with the §481(a) adjustment computed by your CPA.
8. On December 31, 2027, mark every trading position to fair market value and adjust basis.
9. Report on Part II of Form 4797 and expenses on Schedule C; reconcile Form 1099-B to the marked numbers.
10. Before the next April 15, decide whether the election stays; start any revocation a full year early.

Crypto traders report through a different form: see our IRS Form 1099-DA crypto broker reporting playbook.