By Do you actively engage in day trading and meet the criteria for trader tax status (TTS)? If so, you may benefit from electing mark-to-market (MTM) accounting for your trading business—a strategic choice that can offer significant tax advantages.
Why Consider Mark-to-Market Accounting?
Under the MTM method, you treat all trading gains and losses as ordinary income or loss rather than capital gains or losses. This distinction is important for several reasons:
- No $3,000 capital loss limitation. Ordinarily, capital losses are limited to $3,000 per year against ordinary income. With MTM, this limitation does not apply.
- Full loss deductibility. If your trading results in a loss (as is common, particularly for newer traders), you can deduct the full amount of your trading losses against all types of income—whether wages, investment income, or capital gains—on a joint or single return.
- Wash sale rule exemption. MTM traders are not subject to the 30-day wash sale rule, which typically disallows a loss deduction when you purchase a substantially identical security within 30 days of the sale.
- Ordinary income treatment. MTM profits are taxed as ordinary income. While this may seem disadvantageous compared with capital gains treatment, most traders do not hold positions long enough to benefit from long-term capital gain rates. Additionally, trading income is not subject to self-employment tax.
- Qualified business income (QBI) deduction. MTM traders may qualify for the 20 percent Section 199A deduction for qualified business income.
How and When to Make the Election
Electing MTM accounting is considered a change in accounting method and must be made in a specific time frame.
Deadline. You file the election with your tax return for the year before the year you wish the election to take effect. For example, to apply MTM for the 2026 tax year, you must submit the election with your 2025 tax return (or extension request) by April 15, 2026.
Additional requirements. MTM is a change in accounting. You make the change “automatically” by filing Form 3115.
Missed deadline. It’s too late to file for tax year 2025 (the deadline was April 15, 2025). In limited cases, the IRS may grant relief through a private letter ruling—but this is a costly and time-consuming process that requires demonstrating reasonable cause for missing the deadline.
Alternative Strategy: Using an S Corporation
If you’ve missed the MTM deadline as an individual, consider forming a new S corporation to conduct your trading activity. A newly formed entity may make a mark-to-market election within 2 months and 15 days of the start of its first tax year, offering a fresh opportunity to implement this accounting method.
If you would like to discuss MTM, please call me directly at 408-778-9651.