Mark-to-Market Election Deadline 2026 and Section 475 Tax Rules

For active traders, the Section 475(f) mark-to-market election can materially change how securities trading gains and losses are reported. When the election is timely and valid, trading securities are generally reported with ordinary gain or loss treatment, and the wash sale and capital loss limitation rules generally do not apply to the elected trading activity. When the facts or timing are wrong, the result can be expensive.

Trader Tax Status: The Prerequisite

Before discussing the 475(f) election, the taxpayer must qualify as a trader in securities rather than an investor. IRS Topic 429 focuses on whether the taxpayer seeks profit from daily market movements, whether the activity is substantial, and whether it is carried on with continuity and regularity.

The practical review looks at holding periods, frequency, dollar amount of trades, time devoted to trading, and whether investment positions are clearly separated from trading positions. There is no single trade-count shortcut that replaces the facts.

Documentation matters. Trading logs, broker exports, a trading calendar, account separation, and a clearly supported business narrative all strengthen the return position.

What the 475(f) Election Does

Once a qualifying trader makes a timely and valid election, securities subject to the election are marked to market. The mechanics:

• Open trading positions are generally marked to fair market value at year-end.

• Gains and losses from elected trading securities are generally ordinary, not capital, and are generally reported on Part II of Form 4797.

• Wash sale rules under Section 1091 generally do not apply to securities subject to the mark-to-market method.

• The capital loss limitation generally does not apply to elected trading securities.

• Securities held for investment should be identified separately and kept out of the trading activity records.

The Trade-Off

The trade-off is real. Ordinary gain or loss treatment can help a trader with significant losses or wash sale exposure, but it can be unfavorable if the activity includes positions that would otherwise receive long-term capital gain treatment. IRS Topic 429 also notes that gains and losses from selling securities as a trader are not subject to self-employment tax, so retirement plan and entity planning should be modeled separately rather than assumed.

The Critical Deadlines

For an existing taxpayer, the 475(f) election must be filed by the unextended due date of the prior year's return. For a calendar-year individual electing Section 475 for tax year 2026, that generally meant filing the election by April 15, 2026. The statement is attached to the timely filed return or to the extension request, and Form 3115 is generally filed for the year of change.

For a new taxpayer that was not required to file a prior-year return, IRS Topic 429 describes a separate timing rule based on placing the election statement in the books and records no later than 2 months and 15 days after the first day of the election year.

Late elections are generally not allowed, which is why mark-to-market election consulting should happen before the deadline, not after a losing year is already known. For the IRS framework, see IRS Topic 429.

Entity and Record Structure Matters

Entity planning should follow the trading facts, not the other way around. The review should consider trader tax status, account separation, state filing cost, liability goals, estimated taxes, and whether administrative complexity is worth it.

Record structure is equally important. Investment positions should be distinguished from trading positions on the day they are acquired, and multi-broker activity should be reconciled before the return is prepared.

Common Mistakes

• Waiting until after the prior-year return deadline to evaluate the election.

• Failing to file Form 3115 in the change year, creating an unauthorized accounting method change.

• Including investment positions (long-term holdings) in the trading account, contaminating the election.

• Failing to segregate investment versus trading accounts on the books.

• Treating the election as one-time when it's actually a permanent change in accounting method that requires IRS consent to revoke.

The Bottom Line

Section 475(f) is a high-stakes election. For the right active trader — particularly one with significant losses or heavy wash sale exposure — ordinary loss treatment can be valuable. For others, the election can create unfavorable timing or rate results. The decision requires careful modeling of trading patterns, holding periods, account separation, and entity structure.