New IRS Rules: Section 475 MTM Revocation Now Locked for 5 Years – Planning Options for Traders

Last Updated on September 16, 2025 by Robert Green

The IRS recently issued Rev. Proc. 2025-23, which significantly tightens the rules for revoking a Section 475(f) mark-to-market (MTM) election. What was once a “free and easy” revocation process now carries new restrictions and potential costs.

For decades, traders have used an alternative approach to suspend or exit Trader Tax Status (TTS), which also suspends or exits the use of Section 475 MTM and bypasses the need for a formal accounting method change with the IRS.

IRS Five-Year Lock-In Rule Under Rev. Proc. 2025-23

If a taxpayer seeks to revoke Section 475 MTM within this five-year window formally, the following apply:

Non-automatic change procedures: You must use the procedures in Section 24.02(9) of Rev. Proc. 2025-23.
IRS Commissioner consent: Approval is required before the change takes effect.
User fee required: The current IRS fee is $13,225 (per Rev. Proc. 2025-01).
Additional compliance burden: The process is lengthier and more complex than an automatic change.

Outside the five-year window, traders may still revoke a Section 475 election under the automatic change procedures without a user fee or advance IRS consent. According to IRS Topic No. 429 – Traders in Securities (which also confirms the five-year non-automatic revocation rule and is consistent with Rev. Proc. 2025-23 §24.02(8)), this involves:

Filing a revocation notification statement with the IRS by the original due date (without extensions) of the prior-year tax return, attaching it to the return or extension.
Submit Form 3115 (automatic method change) with the current year’s tax return to switch from mark-to-market back to the realization method.

This two-step process is straightforward when outside the five-year window and remains the most cost-effective way to revoke Section 475 MTM.

Example: If you made a Section 475 election for 2022, you cannot use the automatic change procedures to revoke until 2027 (the sixth tax year, counting 2022 as year one). Plan to file your revocation notification with your 2026 tax return (or extension) by April 15, 2027, so that the revocation takes effect for 2027.

Planning Solution: Suspending Section 475 via TTS Disqualification

Suppose a trader wishes to exit Section 475 MTM but avoid the cost and complexity of a non-automatic revocation request. In that case, they can suspend Section 475 MTM by disqualifying from Trader Tax Status (TTS):

TTS is a prerequisite for electing and using Section 475 MTM. A trader must assess eligibility for TTS each tax year. If a trader does not qualify for TTS (e.g., by materially reducing trading activity), Section 475 MTM may not be used during the non-qualification period. This effectively suspends both TTS and Section 475 MTM without requiring a formal IRS revocation. Suspension can occur mid-year if qualification is lost (e.g., a TTS trader since 2023 stops trading on July 31, 2025, and has only a few trades for the remainder of 2025). TTS and Section 475 apply until July 31, 2025, only. Be aware that suspending TTS too aggressively to avoid 475 might backfire if traders lose necessary deductions under Section 162.

If the trader requalifies for TTS in a subsequent year, Section 475 applies again since it was suspended and not formally revoked. Be careful not to incur significant capital losses during the suspended period, as you’ll need capital gains to offset them. Section 475 MTM ordinary income is taxed separately from capital gains and cannot offset capital losses. Capital losses must still be used against capital gains or up to $3,000 of ordinary income per year.
Form a new entity without a Section 475 election. Traders who want to continue qualifying for TTS and deducting business expenses can form a new pass-through entity (LLC taxed as a partnership or S-Corp) that does not elect Section 475. This allows them to continue trading actively while switching back to the realization method.

Comparison of Options

Choose the Right Strategy for Your Situation

Option	When Available	Cost	Process	Pros	Cons
Automatic Revocation	After 5 taxable years from election year	No IRS fee	File notification + Form 3115 under automatic procedures	Simple, free, Commissioner consent not required	Must wait 5 years before revoking
Non-Automatic Revocation	Within first 5 taxable years from election year	$13,225 IRS user fee (2025 rate)	Request permission under Section 24.02(9)	Immediate relief, can exit MTM mid-lock-in	Costly, time-consuming, approval required
Suspend MTM via TTS Disqualification / New Entity	Anytime	No IRS fee	Reduce trading to fail TTS or form new entity without 475 election	Flexible timing, avoids fees, preserves control over timing	May lose business expense deductions if not forming new entity; requires planning

The optimal route depends on timing, activity level, and whether preserving deductions outweighs revoking Section 475 MTM immediately. If you’re considering making or keeping a Section 475 election, here’s what you should know:

Why Traders Elect Section 475

Section 475 offers substantial tax advantages for active traders eligible for Trader Tax Status (TTS). A Section 475 MTM election converts capital gains and losses on securities into ordinary gains and losses, which means:

No wash sale adjustments: Losses are not deferred when buying back substantially identical securities.
No $3,000 capital loss limitation: Ordinary losses are fully deductible against any income, potentially creating a net operating loss carryforward.
Eligibility for the 20% QBI deduction: Section 475 income qualifies as QBI under Section 199A, whereas capital gains are excluded.

How to Elect Section 475(f)

Traders who qualify for TTS may elect Section 475 on securities (f) and/or commodities (e) by taking two steps:

Section 475 Election Statement: File the election statement by the original due date (without extensions) of the prior-year tax return. For example, to elect Section 475 for tax year 2025, the statement must be filed with the IRS by April 15, 2025, attached to the prior-year return or extension request.
Form 3115: File IRS Form 3115 (Application for Change in Accounting Method) with the 2025 tax return, including extensions. This is the second step to implement the election and change the accounting method to mark-to-market (MTM). There is no IRS fee with this automatic election process.
New Entities: New taxpayers, such as a new pass-through entity, may internally elect Section 475 by resolution within 75 days of entity inception. There is no Form 3115 required for adopting this accounting method from inception.

Re-Electing Section 475 After Revocation: Traders who revoke Section 475—either under the automatic or non-automatic procedures—may re-elect Section 475 in a later year without a waiting period. To re-elect, they must follow the same process above: timely file a new election statement by the prior-year deadline and submit a new Form 3115 with the tax return for the election year.

Bottom Line

Rev. Proc. 2025-23 creates a five-year lock-in that makes revoking Section 475 MTM elections more costly and complicated. Traders should carefully plan when to revoke, consider suspension strategies to avoid fees, and weigh the significant tax benefits of Section 475 before making or revoking the election. Readers can review IRS Topic No. 429 – Traders in Securities for additional IRS guidance on revocation timing and procedures.

Call to Action: Consider scheduling a consultation with Green, Neuschwander & Manning, LLC to discuss your specific situation and plan the best strategy for Section 475 elections or revocations.

Darren Neuschwander, CPA, contributed to this blog post.