Two Different Ideas Get Confused
Futures traders already live with one kind of mark-to-market: Section 1256 contracts are marked to market automatically at year-end, with the 60/40 capital split. The Section 475 election is something else — a voluntary election available to traders in securities or commodities who qualify for trader tax status. It converts all trading gains and losses to ordinary income and loss.
Why would anyone give up the 60/40 break? Because capital losses are limited — they offset capital gains plus only a small amount of ordinary income each year. An ordinary loss under Section 475 can offset wages, business income, anything. For a trader with a big losing year, that difference can be enormous.
Who Qualifies and How to Elect
Trader tax status is a facts-and-circumstances test. The IRS looks for substantial, regular, and continuous trading aimed at profiting from short-term swings rather than dividends, interest, or long-term appreciation. There is no bright-line trade count, which is exactly why this area generates audits.
- Deadline: the election is generally due by the original due date of the prior year's return — for most individuals, mid-April of the year it takes effect.
- Form: a statement attached to the return or extension, followed by Form 3115 the next year.
- Binding: revoking the election requires IRS consent. It is not a year-to-year switch.
The Honest Trade-Off
A 475 election on a commodities trader's Section 1256 contracts converts that favorable 60/40 capital blend into ordinary treatment in both directions. Great in a loss year, expensive in a big win year. Some traders separate accounts or entities to keep long-term positions out of the election, and the wash-sale relief mostly matters for securities traders anyway. Also note the election is made per taxpayer and per class — securities and commodities are separate elections — so a trader active in both must decide each deliberately. Sloppy elections here are a common audit trigger.
This is one of the most consequential elections an active trader can make, and it is nearly impossible to unwind. This page is general education, not tax advice. Futures trading involves substantial risk of loss and is not suitable for all investors. Before you elect anything, consult a qualified tax professional who works with traders.