Section 475(f) Mark-to-Market Election (Traders)

Detailed Explanation

The Section 475(f) election lets a trader who already has Trader Tax Status use the mark-to-market method of accounting. At year-end, every open securities position covered by the election is treated as sold at fair market value, so unrealized gains and losses are recognized currently. The character changes too: all gains and losses become ordinary, reported on Form 4797 rather than Schedule D. Three consequences follow. First, the wash-sale rules no longer apply, so December loss harvesting is not disallowed. Second, the $3,000 net capital-loss limitation disappears; trading losses are fully deductible against any income and can create a net operating loss. Third, the trade-off: long-term capital gains rates are forfeited because everything is ordinary. Trading gains remain exempt from self-employment tax even under 475. The election has a strict deadline. An existing taxpayer must file an election statement by the unextended due date of the prior year return (so a 2026 election is due April 15, 2026, with the 2025 return or extension), then file Form 3115 to change accounting methods for the election year, with a Section 481(a) adjustment for the deemed mark of existing positions. A new entity elects by placing a statement in its books within 75 days of inception. The election is effectively irrevocable; under Revenue Procedure 2025-23, revoking within five years requires non-automatic IRS consent and a user fee. This is a different concept from the PFIC mark-to-market election under Section 1296.