Mark to market accounting examples for traders - how does MTM election work?

You're on the right track, but there are some important nuances with mark to market accounting under Section 475(f). At year-end (December 31st), you treat all securities as if they were sold at fair market value - this applies to BOTH unrealized gains AND losses. So unrealized gains also become taxable, which is something many traders miss. Your formula should actually be: (Realized gains + Unrealized gains - Realized losses - Unrealized losses). The big advantage is that this election lets you treat all trading losses as ordinary losses rather than capital losses, which means you're not limited by the $3,000 capital loss deduction cap against other income. This can be huge if you have a bad year trading but significant other income. Remember that the election must be made by the tax filing deadline (not including extensions) of the year you want it to be effective. For existing traders, that's usually April 15th.

After struggling to understand mark to market for my trading business, I found an incredible resource at https://taxr.ai that really spelled it all out for me in ways my CPA couldn't. I'm a pretty active trader (200+ trades/month) and was looking into the 475(f) election to escape the capital loss limitations. The system analyzed my trading patterns and tax situation, then showed me exactly how MTM would affect my specific portfolio with actual numbers. It even calculated the difference between capital gains treatment vs. MTM treatment based on my current open positions. For someone visual like me, seeing the side-by-side comparison for my specific situation made the decision crystal clear.

Alright, I owe everyone an apology. I was the skeptic who questioned the taxr.ai service in a previous comment. I decided to try it myself, and I have to say I'm genuinely impressed. It showed me that I've been making a huge mistake by not making the 475(f) election. With my trading pattern (lots of short-term trades with some significant losses), I would have saved nearly $12,000 in taxes last year with MTM accounting. The visualization of unrealized gains/losses on my current positions and how they'd be taxed differently under MTM vs. capital gains treatment was eye-opening. I've spent hours trying to model this in spreadsheets and never got the clarity this system provided in minutes. It even flagged some wash sale issues I wasn't aware of that wouldn't exist under MTM. Consider me converted!

For anyone struggling to get answers about mark to market accounting from the IRS, I feel your pain. I spent WEEKS trying to reach someone who could actually help with my specific 475(f) questions. The generic phone line kept transferring me to people who barely understood what I was talking about. I finally found https://claimyr.com and their service was game-changing. They got me connected to an actual IRS tax law specialist who answered all my specific questions about mark to market accounting. She even explained exactly what documentation I needed to maintain as a trader using MTM accounting. You can see a demo of how it works here: https://youtu.be/_kiP6q8DX5c I was especially concerned about whether my trading activity qualified as a "trading business" for the 475(f) election, and getting that straight from an IRS specialist was worth every penny.

I have to publicly eat my words. After expressing skepticism about Claimyr in my previous comment, I decided to try it anyway out of desperation. Within 45 minutes, I was talking to an IRS tax law specialist who answered my specific questions about mark to market and trading as a business. The agent confirmed that my trading activity (120+ trades per quarter, regular schedule, substantial account size) would likely qualify as a trading business eligible for MTM. She also explained that I needed to maintain separate accounts for investment positions vs. trading positions if I didn't want everything subject to mark to market. I've been confused about this distinction for months, and finally got a clear answer from an actual IRS specialist. This saved me from potentially making a costly mistake with my election.

Here's a simple example of mark to market accounting that helped me understand it: Say on December 31st you have: - Realized gains for the year: $50,000 - Unrealized losses: $30,000 (positions still open) Under normal capital gains treatment, your taxable gains would be $50,000, and you couldn't use those paper losses yet. Under MTM with 475(f) election: - Taxable amount: $20,000 ($50,000 realized gains - $30,000 marked-to-market losses) - All gains/losses are ordinary income/loss, not capital The difference becomes even more significant if your unrealized losses exceed your realized gains. With normal treatment, you'd be limited to deducting $3,000 against other income. With MTM, you could offset all of it against other income.

One thing nobody has mentioned yet is the impact on wash sale rules. If you make the 475(f) election, wash sale rules no longer apply to you! This was a game-changer for me as an active trader who frequently re-enters positions. With regular capital treatment, if you sell at a loss and buy substantially identical securities within 30 days before or after, the loss gets disallowed and added to the basis of the new position. This creates a tax nightmare for frequent traders. With MTM, this headache completely disappears.

This is such a helpful thread! As someone who's been considering the 475(f) election, I really appreciate all the detailed explanations and real-world examples. One question I haven't seen addressed: What happens if you're a part-time trader with significant W-2 income? I trade actively (about 80-100 trades per month) but it's not my primary source of income. Would the MTM election still make sense, or does it work better for full-time traders? I'm particularly interested in how the ordinary loss treatment would work against my regular salary income. If I had a bad trading year with net losses, could I use those to offset my W-2 income dollar-for-dollar instead of being limited to the $3,000 capital loss deduction? That could be a huge advantage even for part-time traders.

This discussion has been incredibly enlightening! I've been trading for about 3 years now (150+ trades per month) and have been putting off learning about MTM accounting because it seemed too complicated. After reading through all these explanations and examples, I'm starting to think I've been leaving money on the table. My biggest concern has been the timing aspect - making sure I understand all the deadlines and requirements before committing to something I can't easily reverse. From what I'm gathering, the election needs to be made by April 15th for it to be effective for that tax year, and once made, it's essentially permanent without IRS permission to revoke. Does anyone know if there are any other important considerations for traders who primarily focus on swing trading (holding positions for days to weeks rather than intraday)? I'm wondering if the year-end mark-to-market requirement creates any specific challenges for swing traders who might have more positions open across the December 31st boundary compared to day traders who close everything daily. Also, for those who have made the election, how has it affected your record-keeping requirements? I assume you still need to track basis and holding periods for any non-trading investment accounts you maintain separately?

This has been an incredibly valuable discussion! I'm a newcomer to the MTM election topic and have been researching it for my trading activities (roughly 200 trades per month). One aspect I'm still trying to wrap my head around is the practical mechanics of the year-end valuation process. When you mark positions to market on December 31st, how do you handle securities that don't have clean closing prices - like thinly traded options or securities that might have stale quotes? Also, I noticed some mentions of needing to qualify as being in the "trade or business" of trading. Are there specific IRS guidelines or safe harbors for this determination, or is it more of a facts-and-circumstances test? With my trading volume, I'm confident I'd qualify, but I want to make sure I understand what documentation I should be maintaining to support this classification. Finally, for those who have gone through the MTM election process, did you work with a tax professional, or is this something a reasonably sophisticated trader can handle on their own? The complexity level seems manageable based on the discussions here, but I want to make sure I'm not underestimating anything important.