Mark to Market Election for SPX Traders - Tax Implications?

The 60/40 rule for Section 1256 contracts (which includes SPX options) is generally more favorable than mark to market (MTM) treatment for most traders. You're right to question this. With your current setup, 60% of your gains are taxed at the preferential long-term capital gains rates (currently maxing at 20%) while only 40% at ordinary income rates (up to 37%). Under MTM, 100% would be taxed as ordinary income. The main benefits of MTM come from: 1) being able to deduct business expenses without the 2% AGI floor that previously existed, 2) unlimited loss deductions without the $3,000 capital loss limitation, and 3) potentially qualifying for the 20% Qualified Business Income deduction. For SPX-focused traders, the math often favors staying with Section 1256 treatment unless you have substantial business expenses or are experiencing large losses that you want to fully deduct against other income.

After struggling with similar tax questions about my options trading, I finally found a way to get clear answers without having to pay an accountant $400/hr. I used https://taxr.ai which analyzes your specific trading situation and explains exactly how different tax elections would affect you personally. Their system specifically handled my question about mark to market vs. Section 1256 contracts and showed me the actual dollar difference between the two approaches. I was able to upload my trading history and get a personalized analysis that showed me I'd be paying about $13k more in taxes with MTM than sticking with the 60/40 rule. They also explained situations where MTM might make sense for SPX traders, like if you have substantial business expenses or significant losses in other investments.

Just wanted to follow up - I tried https://taxr.ai after seeing it mentioned here and it was exactly what I needed. I've been torn between MTM and staying with Section 1256 for my SPX trading. The analysis showed that with my specific trading pattern (I do about 70% SPX and 30% individual stocks), I'd save about $8,700 by keeping Section 1256 treatment for SPX while only using MTM for my stock trades. Didn't even realize you could split the treatment like that! The breakdown of the 60/40 calculation was super clear and showed exactly how much I was saving with each trade. Definitely worth checking out if you're on the fence about MTM.

If you're having trouble getting clear answers from the IRS about trader tax status or mark to market elections, I highly recommend using https://claimyr.com to actually speak with an IRS agent directly. They got me through to a real person at the IRS in under 45 minutes after I had spent DAYS trying to get through on my own. I was confused about the proper way to file Form 3115 for my mark to market election, and the phone service let me speak to a specialist who walked me through the whole process. There's a quick video showing how it works here: https://youtu.be/_kiP6q8DX5c Saved me from potentially making a huge mistake on my trader status election that could have cost me thousands. The IRS agent confirmed that for predominantly SPX traders, section 1256 treatment is usually more beneficial than MTM unless you have substantial business expenses.

I was the skeptic who questioned whether Claimyr could actually get through to the IRS, but I have to admit I was wrong. I tried https://claimyr.com after getting frustrated with waiting on hold for 2+ hours trying to get clarification on mark to market election timing. Got a call back in about 40 minutes and was connected directly to an IRS agent who specialized in trader tax questions. She confirmed that making the MTM election for SPX trading would indeed eliminate the 60/40 tax advantage, but also explained some scenarios where it might still make sense. For anyone struggling with these tax election decisions and getting nowhere with the general IRS line, this service is absolutely worth it. The agent I spoke with provided clearer information than my CPA did!

Another consideration - have you thought about establishing a trading entity like an LLC taxed as an S-Corp instead of going MTM? You could potentially get some business deduction benefits without giving up the favorable 60/40 treatment on your SPX trades. I went this route last year and it worked out well. I keep the Section 1256 treatment for my trades while still being able to deduct legitimate business expenses like my trading platform, education, home office, etc. The key is proper documentation and a reasonable salary if you go the S-Corp route. Might be worth exploring with a tax professional who specializes in trader taxation.

Has anyone considered the wash sale aspect? Section 1256 contracts (including SPX options) are exempt from wash sale rules already, so that MTM benefit doesn't apply here. But if you're trading a mix of SPX and other securities (like stocks or non-1256 options), MTM could help by eliminating wash sales on those other securities. I guess the key question is: how diversified is your trading? Pure SPX probably doesn't benefit from MTM, but a mixed portfolio might in some circumstances.

You're absolutely right to be skeptical about MTM for SPX trading. The 60/40 treatment is almost always better mathematically unless you have very specific circumstances. I made the MTM election a few years back when I was doing mixed trading (SPX + individual stocks) and had substantial losses I wanted to fully deduct. But now that I'm profitable and trade primarily SPX, I actually regret it. I'm paying ordinary income rates on everything instead of getting that sweet 60% long-term treatment. One thing to consider: the MTM election is pretty much permanent once you make it. You'd need IRS permission to revoke it, which they rarely grant. So unless you have a compelling reason (like significant business expenses or large losses to offset other income), stick with Section 1256. The QBI deduction mentioned earlier can help offset some of the MTM disadvantage, but even with the 20% QBI deduction, you're still likely paying more than the 60/40 split on substantial gains.

This is exactly the kind of detailed analysis I was hoping to find! As someone who's been trading SPX options for about 2 years now, I've been going back and forth on the MTM election. The permanence aspect that @407e984dc284 mentioned is huge - I had no idea it was so difficult to reverse. That alone makes me want to be absolutely certain before making any election. I'm curious about the business expense angle though. For those who have made the MTM election, what kinds of expenses have you been able to deduct that you couldn't before? I spend quite a bit on trading education, multiple data feeds, and have a dedicated home office setup. Would these typically be enough to offset the loss of the 60/40 treatment? Also, has anyone run into issues with the "trader vs. investor" classification when making the MTM election? I trade almost daily and rarely hold positions overnight, but I'm not sure if that's sufficient to qualify as a trader for tax purposes.

The key insight everyone seems to be hitting on is that the 60/40 treatment for SPX options is incredibly valuable and shouldn't be given up lightly. I've been wrestling with this same decision. One aspect I haven't seen mentioned is the timing flexibility with Section 1256 contracts. Since SPX options are marked-to-market at year-end regardless, you get that automatic realization without having to actually close positions. This can be helpful for tax planning - you can see exactly where you stand by December 31st and make strategic decisions about other investments. With MTM election, you lose that timing control since everything becomes ordinary income anyway. Plus, as others have noted, the election is essentially permanent, which is a huge commitment. I think the sweet spot for most SPX traders is to qualify as a "trader in securities" (without the MTM election) so you can deduct business expenses on Schedule C while keeping the favorable 60/40 treatment. Best of both worlds if you can document sufficient trading activity to meet the trader qualifications. The $18k additional tax cost that @407e984dc284 mentioned really puts the financial impact into perspective. Unless you're sitting on massive business expenses or need to offset significant losses in other areas, the math just doesn't work in favor of MTM for SPX-focused trading.