Day Trader Benefits Using the Section 475(f) Election

If you engage in day trading, you may be interested in the benefits of Sec 475(f) Election.

Benefit of Making the Sec. 475(f) Election

The primary benefit of the Sec. 475(f) mark-to-market election (IRC § 475) for day traders is that all trading losses are treated as ordinary losses.

Example:

If a day trader incurs a $15,000 loss from trades throughout the year, this loss can offset ordinary income, such as a $60,000 salary, without being limited by the $3,000 capital loss cap (IRC § 1211). Remaining losses that can’t be used in the current year can be carried forward as net operating losses (IRC § 172).

While trading gains are also treated as ordinary income, day traders typically won’t face a higher tax rate since most of these gains are considered short-term. For instance, if a trader realizes $10,000 in gains, those will be taxed at the same rate as their W-2 income.

If a day trader buys a security with the intention of holding it long-term, they can exclude it from the mark-to-market regime. They must clearly identify this security in their records before the end of the trading day.

Example:

If a trader purchases shares of a company they plan to hold for at least a year and documents this intention, those shares can be treated as an investment rather than part of their trading activity.

Making the Sec. 475 election requires traders to mark securities to market at year-end (IRC § 475(f)). If a trader has a net unrealized loss of $4,000 at year-end, this loss can be recognized for tax purposes, potentially lowering their taxable income. Conversely, if there’s an unrealized gain of $5,000, it would increase their taxable income and tax liability.

Remember: the election must be made in the year prior to it taking effect.