There are two different types of mark-to-market (MTM) rules under the Internal Revenue Code:
- Section 1256 Mark-to-Market (automatic)
- Section 475(f) Mark-to-Market Election (elective for traders)
These rules are often confused but have different applications and tax treatments.
Section 1256 Mark-to-Market (Contracts)
Under Section 1256:
- Certain contracts are automatically treated as sold at fair market value (FMV) on the last business day of the tax year
- Gains and losses are treated as:
- 60% long-term
- 40% short-term capital gains/losses
- Wash sale rules do not apply
What is a Section 1256 Contract?
A Section 1256 contract includes:
- Regulated futures contracts
- Certain foreign currency contracts
- Nonequity options
- Dealer equity options
- Dealer securities futures contracts
How do I report Section 1256 gains or losses?
Use:
- Form 6781 – Gains and Losses From Section 1256 Contracts
Navigation in TaxSlayer:
- Federal Section
- Income
- Less Common Income
- Gains and Losses From Section 1256 Contracts (Form 6781)
Section 475(f) Mark-to-Market Election (Traders)
Section 475(f) allows qualifying traders in securities or commodities to elect MTM treatment.
How it works:
- All positions are treated as sold at FMV at year-end
- Gains and losses are:
- 100% ordinary income or loss (not capital)
- Wash sale rules do not apply
- Losses are not subject to the $3,000 capital loss limitation
Who qualifies for the §475(f) election?
- Must be a trader in securities or commodities (not an investor)
- Activity must rise to the level of a trade or business
How do I make the §475(f) election?
You must:
- File a statement with your return (or extension)
- Include:
- Election under §475(f)
- First tax year effective
- Trade or business description
- File by the original due date (no extensions) for the prior year
How do I report §475(f) gains or losses?
If a taxpayer has a valid §475(f) election, then:
- All trading gains and losses are treated as ordinary income/loss
- They are reported on:
Form 4797 – Sales of Business Property (Part II)
Step-by-Step Reporting §475(f) gains or losses
1. Compute total mark-to-market gain/loss
At year-end:
- Treat ALL open positions as if sold at FMV on 12/31
- Include:
- Realized gains/losses during the year
- Unrealized gains/losses (via MTM adjustment)
Result = Net §475(f) trading gain or loss for the year
2. Report on Form 4797 (Part II)
- Enter total MTM gain/loss as:
- Ordinary gain/loss (not capital)
- Typically reported as:
- Line 10 (or equivalent depending on version)
3. Flow to Form 1040
- Form 4797 → flows to:
- Schedule 1 (Part I) → Other income (or loss)
- Becomes part of:
- Adjusted Gross Income (AGI)
Key impact:
- Losses fully reduce income (no $3K cap)