Mark To Market Election For Active Traders US

When to Use

Use this skill when computing US federal tax figures for an active trader who qualifies for Trader Tax Status (TTS) and is deciding on, or already operating under, an IRC Section 475(f) mark-to-market election.

Under default capital accounting, wash sale rules (IRC § 1091) defer losses and net capital losses are deductible against ordinary income only up to $3,000 ($1,500 married filing separately, § 1211(b)). A § 475(f) election converts trading P&L to ordinary gain/loss on Form 4797 Part II, disapplies § 1091 to losses recognized under § 475(a), and marks open positions to fair market value at year end.

When NOT to Use

• You are an investor, not a trader. § 475(f) is available only to a person engaged in a trade or business as a trader. TTS qualification is a separate facts-and-circumstances question this skill does not decide.
• Futures and broad-based index options. § 475(f)(1) reaches securities only. § 1256 contracts need the separate § 475(f)(2) commodities election, and making it forfeits 60/40 treatment — use section-1256-contract-tax-treatment-us-futures instead.
• You need the wash sale computation itself. This engine consumes a disallowance amount; it does not scan the 61-day window. Use wash-sale-rule-tracking-us.
• State returns, § 481(a) catch-up adjustments, or § 1092 straddles. Out of scope; see Prerequisites.
• As a substitute for a tax professional. Output is audit support for a return position, not the return.

Prerequisites

• Python 3.10+, standard library only.
• Confirmation that the election is perfected, not merely intended: a Rev. Proc. 99-17 statement filed by the unextended due date of the prior year's return (new taxpayers: in books and records within 2 months and 15 days of the election year's first day), plus Form 3115 for the method change.
• realized_trades: List[RealizedTrade] — per-unit sell_price and cost_basis. For a previously marked lot, cost_basis must be the prior year-end mark (§ 475(a)).
• open_tax_lots: List[TaxLot] — per-unit buy_price, year_end_fmv_price, and prior_year_end_mark_price for any lot carried across a year end.
• filing_status and tax_year — both drive statutory thresholds.
• other_net_business_income_usd if the taxpayer has any other trade or business; § 461(l) is tested on the aggregate.

Explicitly out of scope: § 481(a) adjustments and their four-year spread, § 1092 straddle deferral, short-term/long-term character splitting, state conformity, and decimal-exact accounting (amounts are IEEE-754 doubles summed with math.fsum and rounded to cents).

Workflow

1. Verify the election before trusting the flag. is_mtm_elected=True asserts filed paperwork. If the Rev. Proc. 99-17 statement or Form 3115 is unconfirmed, compute the capital branch — an unperfected election reported on Form 4797 loses the entire benefit on examination. Pass election_effective_first_tax_year; the engine rejects a tax_year that precedes it (§ 475(f)(3): the election is never retroactive).
2. Partition the blotter. Elected securities are marked. Securities identified for investment under § 475(f)(1)(B) — which requires identification in the records on or before the day acquired, not a year-end reclassification — are excluded, stay capital, and stay subject to § 1091. § 1256 contracts are routed out unless elects_commodities_475f2=True.
3. Compute realized and marked P&L. Realized P&L uses the § 475-adjusted basis. Each open lot marks from prior_year_end_mark_price when it was carried across a year end, otherwise from buy_price: $$\text{MTM P&L} = \sum_i (\text{FMV}_i - \text{Basis}^{475}_i) \times \text{Qty}_i$$ Marking a carried lot from its original purchase price double-counts every prior year's appreciation. Flag open shorts with is_short=True; a negative quantity is rejected rather than silently inverting the mark.
4. Apply the limitation that actually governs.
   • Elected: the ordinary loss is limited by § 461(l) — aggregate net business loss above the threshold ($256,000 / $512,000 joint for 2026, Rev. Proc. 2025-32) is disallowed and carried forward as an NOL, itself capped at 80% of taxable income on use. When no citable threshold exists for the year, the engine reports NOT_EVALUATED_SEE_FORM_461 rather than implying an unlimited deduction.
   • Not elected: § 1211(b) allows the lower of $3,000 ($1,500 MFS) or the excess over capital gains; § 1212(b) carries the remainder forward indefinitely.
5. Read the warnings list. Anything routed out, capped, or left unevaluated is recorded there. An empty list is the only clean result.

Full procedure: see references/workflows.md. Standards reference: see references/standards.md. Printable pre-flight checklist: see assets/checklist.md.

Common Pitfalls

• Treating "no $3,000 cap" as "no cap". § 475(f) removes the capital loss limitation, not § 461(l). A single filer with a $600,000 ordinary trading loss in 2026 deducts $256,000 and carries $344,000 forward as an NOL — not $600,000.
• Re-marking a carried lot from its purchase price. § 475(a) requires "proper adjustment ... in the amount of any gain or loss subsequently realized". A lot bought at 100, marked to 140 last year and worth 150 this year contributes $10/share, not $50/share. Running the engine two years in a row without prior_year_end_mark_price overstates income by the whole first mark.
• Universalizing the wash sale waiver. § 475(d)(1) disapplies § 1091 only to losses recognized under § 475(a) — and in the same sentence expressly preserves § 1092. Securities identified for investment, and any account outside the elected trade or business, remain fully subject to § 1091.
• Sweeping futures into a securities election. A § 475(f)(1) election reaches no § 1256 contract. Conversely, adding the § 475(f)(2) commodities election to capture ordinary loss treatment silently forfeits 60/40 on every future — the trade is rarely worth it for a profitable futures book.
• Back-dating the investment identification. § 475(f)(1)(B) borrows the § 475(b)(2) rule: identification must exist in the records before the close of the day the security was acquired. Picking losers at year end and calling them investments does not work.
• Electing late. The statement is due by the unextended due date of the prior year's return. Missing it by a day pushes the election a full year out; there is no relief in the engine and generally none from the IRS.
• Applying self-employment tax to Form 4797 Part II trading income. IRS Topic No. 429: trading gains are not subject to SE tax.
• Discarding the capital loss carryforward. § 1212(b) carries the unallowed excess forward indefinitely; dropping it silently overstates next year's tax.

Verification

• Instantiate MarkToMarketTaxEngine(filing_status="SINGLE"). For a trader with a $600,000 net ordinary trading loss in tax_year=2026 and is_mtm_elected=True: verify wash_sale_disallowed_usd == 0.0, total_reportable_taxable_pl_usd == -600000.0, reportable_loss_deduction_usd == -256000.0, excess_business_loss_disallowed_usd == 344000.0, and tax_form_mapping == "Form 4797 Part II (Ordinary Income)".
• With is_mtm_elected=False and a $10,000 realized capital loss: verify reportable_loss_deduction_usd == -3000.0, capital_loss_carryforward_usd == -7000.0, and Schedule D mapping.
• With a lot at buy_price=100, prior_year_end_mark_price=140, year_end_fmv_price=150, quantity=100: verify unrealized_mtm_pl_usd == 1000.0, not 5000.0.
• Run the suite:

python -m unittest discover -s skills/mark-to-market-election-for-active-traders-us/scripts

Related Skills

• wash-sale-rule-tracking-us
• section-1256-contract-tax-treatment-us-futures
• fifo-vs-specific-lot-tax-accounting-methods
• record-keeping-requirements-for-tax-audit-defense