Form 72: Mark-to-Market Election for Traders

The mark-to-market election under Internal Revenue Code Section 475(f) allows certain individuals to change how their trading gains and losses are treated for tax purposes. Instead of the default capital gain and loss treatment, this election permits qualifying individuals to treat these amounts as ordinary income and loss. This alters the tax outcome of trading activities, moving them from personal investment into what the IRS considers a business activity. The election is designed for those who meet the definition of a “trader in securities or commodities.”

Making this election is a formal change in accounting method requiring adherence to procedural rules. The process involves filing a specific statement with a tax return, not checking a box on a form. A related document, Form 3115, Application for Change in Accounting Method, is also part of the process.

Determining Eligibility for the Election

The ability to make the mark-to-market election depends on qualifying for “trader tax status,” a distinct classification from that of an “investor.” An investor buys and sells securities expecting to earn income from dividends, interest, or long-term appreciation. Their activity is not considered a trade or business, and they hold securities for substantial periods.

To be recognized as a trader, an individual’s activity must be substantial, frequent, and continuous, representing a primary source of income. The IRS looks for a high volume of trades placed regularly to profit from short-term price movements. The time and effort devoted to the activity must also be considerable.

The distinction is a matter of facts and circumstances with no single test. For instance, someone who makes a few trades a week and holds positions for months is an investor. In contrast, an individual who executes numerous trades daily and dedicates their workday to it is more likely to qualify as a trader. The securities or commodities involved include stocks, bonds, options, and derivative instruments.

Failing to meet these criteria means an individual remains an investor and cannot make the Section 475(f) election. This dictates whether trading losses are limited capital losses or fully deductible ordinary business losses.

Information Required for the Election

There is no specific, numbered IRS form for making the mark-to-market election. The process requires filing a specific statement and Form 3115, for which a taxpayer will need their name, address, and Taxpayer Identification Number (TIN).

The core of the process is an election statement attached to the tax return. This statement must specify that the taxpayer is making an election under Section 475(f). It also needs to state the first tax year for which the election is effective and identify the specific trade or business. For example: “This is an election under Section 475(f) for the trade or business of trading in securities, effective for the tax year beginning January 1, 2026.”

In addition to the statement, the taxpayer must file Form 3115, Application for Change in Accounting Method, because this is a change in accounting. Completing Form 3115 involves providing details about the previous accounting method and calculating any adjustment needed under Section 481, which accounts for changes in income or deductions from the new method.

Filing the Election

The election must be made by the original due date of the tax return for the year prior to the year the election is to take effect. For example, for the election to apply to the 2026 tax year, it must be made by the original filing deadline for the 2025 tax return, which is April 15, 2026.

This deadline is not extended, even if you file for an extension to submit your tax return. The election is made by attaching the required statement to either the tax return itself (if filed by the original deadline) or to a timely filed request for an extension, such as Form 4868.

The completed Form 3115 must be filed with the tax return for the year of the change. Revenue Procedure 2024-23 outlines the requirements for this change in accounting method. Failure to follow these steps, such as missing the filing deadline or omitting the required statement, can invalidate the election and cause trading losses to be recharacterized as capital losses.

Tax Implications of the Election

A valid mark-to-market election changes the tax treatment of trading activities. All securities held in the trading business at year-end are treated as if sold for their fair market value on the last business day of that year. This “marking-to-market” means unrealized gains and losses are recognized for tax purposes annually.

The resulting gains or losses are reported as ordinary income or loss, not capital gains or losses. This allows trading losses to offset other ordinary income, such as wages, without the $3,000 annual limit on net capital losses. These gains and losses are reported on Form 4797, Sales of Business Property.

The wash sale rule no longer applies to securities covered by the election. This rule normally disallows a loss on the sale of a security if an identical one is purchased within 30 days before or after the sale. Additionally, expenses related to the trading business, which are limited for investors, may become fully deductible on Schedule C (Form 1040).

Revoking the Election

A mark-to-market election under Section 475(f) is binding for all subsequent years. A taxpayer cannot simply stop using the method; the election must be formally revoked, which requires receiving consent from the IRS. The process for revocation is strict.

To request a revocation, the taxpayer must file a notification statement with the IRS. This statement must be filed by the original due date of the tax return for the year before the revocation is to become effective. For instance, to revoke the election for the 2027 tax year, the notification must be filed by the original due date of the 2026 tax return, April 15, 2027. This deadline is not extended.

In addition to the notification, the taxpayer must file a Form 3115 to change their accounting method back to reporting gains and losses when securities are sold. The IRS reviews the request and the taxpayer’s reasons for it. The IRS has the authority to grant or deny the revocation, and approval is not automatic.