Question 1

What is the Mark to Market Election?

Accepted Answer

The Mark to Market election is an affirmative election - made by the taxpayer on a tax return or extension - to be taxed as a dealer in securities, except without the carrying of securities inventory - stocks that a dealer would make a market in and sell to other traders.

When making a change in one's method of accounting - which a MTM election is - Form 3115 must be filed notifying the IRS of the change.  Along with Form 3115, an IRC Sec 481(a) adjustment must be made adjusting all open positions to their fair market value on the last day of the previous tax year.

That adjustment typically results in gain or loss being recognized on the first day of the MTM year.

But what if you make the MTM election for a new entity?  There is no technical "change" in the accounting method since you have elected MTM from the start.  Does Form 3115 need to be filed with the first year return?  I would say no but you need to make sure that your organizational documents and the MTM election - which accompanies your organizational documents - have the same date.

Question 2

What Internal Revenue Code section covers the MTM election?

Accepted Answer

Internal Revenue Code section 475(f) and IRS Rev Proc 2008-52

Question 3

Is there a deadline for making the MTM election?

Accepted Answer

Yes.  The deadline for making the MTM election is the due date of the tax return for the immediately preceding tax year or the extension of that tax return.

For example, a trader wishes to make the MTM election for 2026.  The deadline for making that election is the original due date of the tax return for the immediately preceding tax year (2025), which would be either March 15, 2026 - for flow-through entities such as a partnership or S corporation - or April 15, 2026 for individuals and other entities.

The election is attached either to the tax return itself or the extension.

Question 4

Is there an extension of time for making the MTM election?

Accepted Answer

Theoretically there is, under Reg Sec 301.9100.  However, for all intents and purposes, there is no extension for making the mark to market election.

The reason for this is that the government does not want a trader to have the benefit of 20/20 hindsight - knowing that the trader has large losses - for the entire year.  The election must be made during the first part of the year, by March 15 or April 15 depending on the type of trader.

Question 5

What if a trader missed the MTM election due date?

Accepted Answer

The due date is either March 15 or April 15 typically.

However, the trader could form a new entity soon after those dates, and transfer all trading securities into the newly formed entity and make a MTM election within 2-1/2 months of the formation of the new entity.

This would preserve some of the year for MTM trading.

I receive a number of questions regarding "9100 relief" regarding the MTM election missed due date.  So what is "9100 relief"?

This is a reference to Regs Sec 301.9100-3 "Other extensions".  Specifically it addresses non-automatic extensions described in Regs Sec 301.9100-2.  Most people only read sections (a) and (b) the regulation which provides the general requirements and addresses if the taxpayer acted with reasonableness and in good faith when they missed the election.  Unfortunately, forgetting the deadline is not reasonable and not a defense.

The focal point in 301.9100-3 is section (c) describing that there can be no prejudice to the government's interest, in short, it cannot reduce the taxpayer's tax liability.

Many people have also read the Vines decision and believe they fit that fact pattern, where Vines was granted 9100 relief for a missed MTM election.

The problem with reliance upon Vines is that most people did not do what Mr Vines did, he ceased all trading upon learning that the election date was missed - no trades after 4/15.  So, there was no prejudice in the government's position because they would be no worse off if the election had been made or not.  Thus, 9100 relief was granted.

Question 6

Can a trader take accumulated wash sales into a MTM tax year?

Accepted Answer

The answer technically is both "Yes" and "No".

You may have wash sales added to the basis of stock at the end of the year.  In the first MTM year, when the IRC Sec 481(a) adjustment is made, the basis of the shares is adjusted to fair market value at that time.  If the FMV is less than the basis of the stock, the wash sale loss is technically "recognized" at that time.

However, if the FMV of the stock is greater than the basis of the stock, a gain is recognized but it will be reduced because of the wash sale loss addition to basis.

OptionsTaxGuy

Mark-To-Market Election

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