Electing and Revoking Mark-to-Market
By “default,” traders are usually taxed under the oftentimes undesirable §1221 capital gains method (realization method) of accounting, just the same as most other taxpayers.
But taxpayer businesses that maintain a complete and separable set of accounting books and records which qualify under IR Reg. §1.446-1(d)(1) and that otherwise qualify to file with Trader Status may optionally elect in advance(*1), by filing with the IRS, to use the “Mark-to-Market” (M2M or MTM) method of accounting, pursuant to IRC §475(f), for the election year and all ensuing years, as described below. This accounting method treats what would normally be Schedule D “capital gains and losses” as Form 4797 “ordinary gains and losses.”
Note: this page discusses the IRC §475(f)(1) M2M election for Securities traders. A discussion about the IRC §475(f)(2) M2M election for Futures and Commodities traders is found here.
With the number of M2M elections filed on self-prepared tax returns, or otherwise improperly prepared elections and tax returns , it is very possible that the Internal Revenue Service will continue to take a close look at all returns electing M2M, and any resulting NOL carrybacks and especially those prepared by taxpayers without the benefit of professional guidance as evidenced by a “paid preparer” on the signature page. To better assist taxpayers, starting with the 2000/2001 tax filing seasons, the Internal Revenue Service added information for securities traders in their filing forms instructions, publications (pdf), and on their FAQ web page and on their Tax Topics web page.
It is also possible, but not necessarily probable, that due to widespread filing of defective as well as inappropriate M2M elections (by both self-preparers and by paid professionals) that there may be some relief offered to taxpayers to retroactively correct errors made. As of 2016, only limited relief has been made available; to the contrary, to date, the IRS and the Courts have strictly construed the election requirements.
Prior to 1934, a trader in securities was taxable on the gains derived from his trading activities as ordinary income. Such gains were excluded from the capital gains provisions of the IRS Code because “capital assets” were defined as not including “property held by the taxpayer primarily for sale in the course of his trade or business.”
Then in 1934 Congress amended IRC §117 to treat securities trading as transactions in capital assets in order that losses incurred in these transactions could not be deducted in full. The Revenue Act of 1934 amended the definition of “capital asset” in the new IRC §117 so as to exclude, not all property held primarily for sale in the course of business, but now to exclude only such property as was held primarily for sale “to customers” in the “ordinary” course of business. Since the sale on a securities exchange is not usually considered to be a sale “to customers,” it was asserted that this amendment made it “impossible to contend that a stock speculator trading on his own account is not subject to the provisions of §117” or, to state it in the positive, that from then on a stock speculator trading for his own account would be subject to capital gain and loss treatment under IRC §117 unless he first properly elects the mark-to-market provisions under IRC §475.
ELECTING MARK-TO-MARKET
Rev. Proc. 2015–14 – February 2, 2015
SECTION 23. MARK-TO-MARKET ACCOUNTING METHOD (§ 475)
Rev. Proc. 2016–29 – May 5, 2016
SECTION 23. MARK-TO-MARKET ACCOUNTING METHOD (§ 475)
Rev. Proc. 2017–30 – May 1, 2017
SECTION 23. MARK-TO-MARKET ACCOUNTING METHOD (§ 475)
.01 Commodities dealers, securities traders, and commodities traders electing to use the mark-to-market method of accounting under § 475(e) or (f).
(1) Description of change. This change applies to certain taxpayers that have elected to use the mark-to-market method of accounting under § 475(e) or (f). Under § 475(e) and (f) and Rev. Proc. 99-17, 1999-1 C.B. 503, if a taxpayer makes an election under § 475(e) or (f), then beginning with the first taxable year for which the election is effective (election year), mark to market is the only permissible method of accounting for securities or commodities subject to the election. Thus, if the electing taxpayer’s method of accounting for its taxable year immediately preceding the election year is inconsistent with § 475, the taxpayer is required to change its method of accounting to comply with the election. A taxpayer that makes a § 475(e) or (f) election but fails to change its method of accounting to comply with that election is using an impermissible method. See section 4 of Rev. Proc. 99-17.
(2) Applicability Scope. This change applies to a taxpayer if all of the following conditions are satisfied:
(a) the taxpayer is a commodities dealer, securities trader, or commodities trader that has made a valid election under § 475(e) or (f) (see section 5.03(1) of Rev. Proc. 99-17) and that is required to change its method of accounting to comply with the election;
(b) the method of accounting to which the taxpayer changes is in accordance with its election under § 475(e) or (f); and
(c) the year of change is the election year.
(3) Scope limitations inapplicable. The scope limitations in section 4.02 of this revenue procedure do not apply to this change.
(4) Election under Rev. Proc. 99-17. In accordance with section 5.03(1) of Rev. Proc. 99-17, in order to make a section 475(e) or (f) election, a taxpayer must file a statement satisfying the requirements in section 5.04 of Rev. Proc. 99-17. The statement must be filed not later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year and must be attached either to that return or, if applicable, to a request for an extension of time to file that return. For example, if a calendar year individual taxpayer wants to make a section 475(e) or (f) election for 2014 (the election year), the taxpayer must file the statement on or before April 15, 2014, with the taxpayer’s timely filed (without regard to extensions) federal income tax return for 2013 or the taxpayer’s timely filed request for an extension of time to file the 2013 federal income tax return. On the Form 3115 filed for the year of change, a taxpayer should indicate that the taxpayer has filed the statement in compliance with section 5.03(1) of Rev. Proc. 99-17.
(5) Designated automatic accounting method change number. The designated automatic accounting method change number for a change under section 23.01 of this APPENDIX is “64.” See section 6.02(4) of this revenue procedure.
(6) Contact information. For further information regarding a change under this section, contact Eric E. Boody at 202-622-3950 (not a toll-free call).
.02 Reserved (until 2015 when the automatic approval of the revocation of M2M was allowed – see that update, below).
http://www.irs.gov/irb/2011-04_IRB/ar08.html#d0e9496
REVOKING MARK-TO-MARKET
update for 2015:
(6) Contact information. For further information regarding a change under this section, contact Eric E. Boody at (202) 317-6945 (not a toll-free number).
.02 Taxpayers requesting to change their method of accounting from the mark-to-market method of accounting described in § 475 to a realization method.
(1) Description of change. This change applies to any taxpayer requesting permission to change its method of accounting for securities or commodities as defined in § 475 from the mark-to-market method of accounting described in § 475 to a realization method of accounting. For example, this section 23.02 applies when a taxpayer is required to change its method of accounting to a realization method after revoking an election under § 475(e), (f)(1), or (f)(2).
(2) Exclusive procedure. The procedure set forth in this section 23.02 is the exclusive procedure for changing a taxpayer’s method of accounting from the mark-to-market method described in § 475 to a realization method. Thus, filing the Notification Statement described in section 23.02(6) of this revenue procedure is the exclusive manner of revoking a § 475(e), (f)(1), or (f)(2) election. Moreover, any taxpayer requesting permission to change to a realization method must follow the procedures described in this section 23.02 and other applicable provisions of Rev. Proc. 2015–13, 2015–5 I.R.B. 419, to request consent to change its method of accounting for securities described in § 475(c)(2) (Section 475 Securities), commodities described in § 475(e)(2) (Section 475 Commodities), or both.
(3) Applicability. This change applies to a taxpayer if all of the following conditions in paragraphs (a) through (c) below are satisfied:
(a) the taxpayer is using, properly or improperly, the mark-to-market method of accounting described in § 475;
(b) the taxpayer is requesting permission to change to a realization method of accounting and report gains or losses from the disposition of Section 475 Securities, Section 475 Commodities, or both, under § 1001; and
(c) the taxpayer meets the requirements of this section 23.02, including the requirement that it timely file the Notification Statement described in section 23.02(6) of this revenue procedure.
(4) Certain eligibility rules inapplicable. The eligibility rules in sections 5.01(1)(d) and (f) of Rev. Proc. 2015–13 do not apply to this change.
(5) Manner of making change. This change is made using a cut-off basis and applies only to Section 475 Securities, Section 475 Commodities, or both, that are accounted for using the mark-to-market method of accounting described in § 475 and for which a change in method is requested under this section 23.02. Accordingly, a § 481(a) adjustment is neither permitted nor required.
Under the cut-off basis, a taxpayer must make a final mark of all Section 475 Securities, Section 475 Commodities, or both, that are being marked to market and that are the subject of the accounting method change being requested, on the last business day of the year preceding the year of change. As a result of the final mark, gain or loss attributable to those securities and commodities is also recognized on the last business day of the year preceding the year of change. In the case of any Section 475 Security or Section 475 Commodity that a taxpayer holds on the first day of the year of change, the taxpayer must make proper adjustment in the amount of any subsequently realized gain or loss to take into account adjustments for the gain or loss recognized prior to the first day of the year of change pursuant to the use of the mark-to-market method of accounting described in § 475 in order to prevent amounts from being duplicated or omitted. Any change in value on or after the first day of the year of change will be taken into account using a realization method of accounting unless section 23.02(7) of this revenue procedure permits the taxpayer to resume a mark-to-market method and the taxpayer resumes a mark-to-market method.
(6) Notification Statement required. In addition to filing the Form 3115 required under section 6.03(1) of Rev. Proc. 2015–13, to change to a realization method of accounting under this section 23.02 of this revenue procedure, a taxpayer must also file a Notification Statement that satisfies the requirements in section 23.02(6) of this revenue procedure. The Notification Statement must be filed not later than the due date (without regard to any extension) of the original federal income tax return for the taxable year immediately preceding the year of change and must be attached either to that return or, if applicable, to a request for an extension of time to file that return.
(a) Notification Statement contents. The Notification Statement must contain
(1) the name of the taxpayer that will change its method of accounting (that is, the applicant), and, if applicable, the filer (for example, its parent corporation);
(2) a statement that the taxpayer is requesting to change its method of accounting from the mark-to-market method of accounting described in § 475 to a realization method;
(3) the year of change (both the beginning and ending dates); and
(4) the types of instruments subject to the method change, that is, Section 475 Securities, Section 475 Commodities, or both.
If a taxpayer has made an election under § 475(e), (f)(1), or (f)(2),
(5) the taxpayer must also include a statement revoking the taxpayer’s section 475 election or elections for the Section 475 Securities, Section 475 Commodities, or both, for which a change in accounting method is sought.
(b) Effect of filing Notification Statement. Once the taxpayer files a Notification Statement for the year of change, a realization method of accounting is the only permissible method of accounting for Section 475 Securities, Section 475 Commodities, or both, described in the Notification Statement for the entire year of change and all subsequent years (unless section 23.02(7)(a) of this revenue procedure applies). A taxpayer that files the Notification Statement described in this section 23.02 but fails to change its method of accounting using the procedures described in Rev. Proc. 2015–13 and this section 23.02 is using an impermissible method.
(c) Limited § 301.9100 relief. Section 9100 relief for failure to comply with the requirements of this section 23.02(6) will be granted only in unusual and compelling circumstances.
(7) Additional requirements.
(a) Resuming the mark-to-market method of accounting. A taxpayer may not use the automatic change procedures in Rev. Proc. 2015–13 and section 23.01 of this revenue procedure to resume using the mark-to-market method of accounting described in § 475 for the Section 475 Securities, Section 475 Commodities, or both, that are the subject of the method change being requested using this section 23.02 during any of the five taxable years beginning with the year of change. To resume using the mark-to-market method of accounting described in § 475 during this 5-year period, a taxpayer must: (i) request the change using the non-automatic change procedures in Rev. Proc. 2015–13, (ii) request the change by the date an election would be due under section 5.03 of Rev. Proc. 99–17, 1999–1 C.B. 503, and (iii) include a statement that satisfies all applicable requirements of section 5.04 of Rev. Proc. 99–17.
(b) Copy of Notification Statement. A taxpayer must attach a copy of the Notification Statement required in section 23.02(6) of this revenue procedure to its Form 3115 filed under this section 23.02.
(c) No audit protection for valuation. A taxpayer does not receive audit protection under section 8.01 of Rev. Proc. 2015–13 for the method of valuation used by the taxpayer to determine the fair market value of the taxpayer’s Section 475 Securities, Section 475 Commodities, or both, for a taxable year prior to the year of change, or for a failure to comply with the requirements in Rev. Proc. 99–17 to properly elect the mark-to-market method. See section 8.02(2) of Rev. Proc. 2015–13.
(8) Designated automatic accounting method change number. The designated automatic accounting method change number for a change under this section 23.02 is “218”.
(9) Contact information. For further information regarding a change under this section, contact Eric E. Boody at (202) 317-6945 (not a toll-free number).
https://www.irs.gov/irb/2015-5_IRB/ar13.html#d0e19369
https://www.irs.gov/irb/2017-18_IRB
1.This revenue procedure provides the exclusive procedure for dealers in commodities and traders in securities or commodities to make an election to use the mark-to-market method of accounting under § 475(e) or (f) of the Internal Revenue Code.
5.03(1) General procedure. Except as provided in section 5.03(2) of this revenue procedure, for a taxpayer to make a § 475(e) or (f) election that is effective for a taxable year beginning on or after January 1, 1999, the taxpayer must file a statement that satisfies the requirements in section 5.04 of this revenue procedure. The statement must be filed not later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year and must be attached either to that return or, if applicable, to a request for an extension of time to file that return.
5.03(2) New taxpayers. A new taxpayer is a taxpayer for which no federal income tax return was required to be filed for the taxable year immediately preceding the election year. A new taxpayer makes the election by placing in its books and records no later than 2 months and 15 days after the first day of the election year a statement that satisfies the requirements in section 5.04 of this revenue procedure. To notify the Service that the election was made, the new taxpayer must attach a copy of the statement to its original federal income tax return for the election year.
5.04 Required statement. The statement must describe the election being made, the first taxable year for which the election is effective, and, in the case of an election under § 475(f), the trade or business for which the election is made.
Footnote:
(*1) Generally, individuals elect to use the mark-to-market method of accounting by filing the election statement no later than April 15th for the year of the election (i.e. after the beginning and also before April 16th of the year for which M2M takes effect). For most partnerships, LLCs and corporations that means no later than March 15th (or April 15th as the case may be) for the year of the election. For new taxpayers, for example those who have not previously filed an income tax return (such as a newly formed multi-member LLC), then that means #1 preparing the actual election statement no later than 2 months and 15 days after the entity’s formation and #2 to notify the IRS that the election was timely made, the new taxpayer must attach a copy of the statement to its original federal income tax return for the election year (which is filed after the end of the first year).
The §475(f) election may be revoked by filing a request to change the method of accounting no later than April 15th for the year of the revocation (or other date similar as described above) – or in lieu of revocation the owners may simply stop using the entity, liquidate it or dissolve it.
In addition, generally, IRS form 3115 must be timely filed one year after the request to change is filed: either the request to change to M2M or a request to revoke a prior M2M election.
But note that the IRS Topic 429 states that “Non-filing of the Form 3115 mentioned above will not invalidate a timely and valid election.”
Late M2M elections are generally not allowed:
Pursuant to Reg. §301.9100-2(b) This paragraph (b) does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions.
nor pursuant to Reg. §301.9100-3(c)(2)(ii) and Reg. §301.9100-3(f) Example 5 For elections that require an IRC §481(a) adjustment.
Late M2M revocations are generally not allowed:
Pursuant to Reg. §301.9100-2(b) This paragraph (b) does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions.