Section 475 MTM Accounting

TTS traders consider a Section 475 election for tax-loss insurance and a QBI deduction.

Traders eligible for trader tax status (TTS) have the option to make a timely election for the Section 475 accounting method on securities and/or commodities. Section 475 is mark-to-market (MTM) accounting with ordinary gain or loss treatment. Without it, securities traders use the realization (cash) method for capital gains and losses, including wash-sale loss adjustments and the annual $3,000 capital loss limitation. We call it tax-loss insurance. There are also tax benefits for profitable traders with the 20% QBI deduction (see below).

Caution: Sole proprietor (individual) TTS traders who missed the Section 475 MTM election date (April 15, 2025, for 2025) can’t use ordinary loss treatment and are stuck with capital gains and losses, including capital loss carryovers. You might prefer to skip a 475 election for 2026, due by April 15, 2026, if you need capital gains to use up capital loss carryovers from 2025, as 475 is ordinary income, especially if you have capital gains in Q1 2026. (We review the decision-making in Green’s Trader Tax Guide, chapter 2.)

A new entity (new taxpayer) could deliver Section 475 MTM on trading losses generated in the entity account if it filed an internal Section 475 MTM election within 75 days of inception. A new entity should be in business for a minimum of Q4 to establish TTS.

Ordinary losses offset all types of income (wages, portfolio income, and capital gains) on a joint or single return, whereas capital losses offset only capital gains. 

Excess Business Loss Limitation

In 2018, the TCJA introduced an EBL limitation under Section 461(l), restricting the amount of business losses that noncorporate taxpayers could deduct in a single year. OBBBA made this limitation permanent and indexed it to inflation annually. For 2025, the thresholds are $626,000 (married filing jointly) and $313,000 (single/other filers). For 2026, due to changes from OBBBA, the indexed limits are $512,000 (MFJ) and $256,000 (single). Any loss amount exceeding these limits is treated as a Net Operating Loss (NOL) carryforward, subject to the 80% taxable income limitation.

Qualified Business Income Deduction

TCJA and OBBBA also offer a 20% qualified business income (QBI) tax deduction for pass-through entities, including TTS partnerships, S-Corps, and sole proprietors. TTS trading is a specified service trade or business, so it is subject to an income threshold and a cap. QBI includes 475 ordinary income, excluding capital gains and losses, portfolio income, and foreign-exchange gains and losses. TTS expenses are negative QBI. A profitable TTS/475 trader is eligible for the QBI deduction, provided their taxable income is not over the QBI thresholds.

OBBBA made §199A permanent and, beginning in 2026, widened the SSTB phaseout width to $150,000 (MFJ) / $75,000 (single/MFS).

SSTB Thresholds and Phaseout Ranges

• 2025: Threshold $394,600 (MFJ) / $197,300 (single/MFS); phaseout width $100,000 / $50,000 → top $494,600 / $247,300.
• 2026: Threshold $403,500 (MFJ) / $201,750 (single) / $201,775 (MFS); phaseout width $150,000 / $75,000 → top $553,500 / $276,750 / $276,775.

Year-end W-2 wage and UBIA planning can help maintain a deduction within the phaseout band. 

By making a 475 election on securities only, TTS traders retain lower 60/40 capital gains rates on Section 1256 contracts (futures).

Securities traders can segregate investment positions for long-term capital gains. If there is overlap between securities trades and taxable investment positions, consider an entity to ring-fence TTS/475 from segregated investment positions at the individual level.

Section 475 election procedures

Existing individual taxpayers who qualify for TTS and want to file under Section 475 must file a 2026 Section 475 election statement with their 2025 tax return or extension by April 15, 2026. The second step of a 2026 Section 475 election is to file a 2026 Form 3115 with the 2026 tax return in 2027. (Existing partnerships and S-Corps will file similarly by March 15, 2026.)

There are updated IRS rules governing the revocation of a Section 475 election. Click here for our blog post on these new rules. 

Revised excerpt from Green’s Trader Tax Guide 

Get Help With Your Section 475 Election

Section 475 is deadline-sensitive and easy to get wrong — the election statement, Form 3115, and your trader tax status facts all have to align. Consider a 50-minute consultation with Green, Neuschwander, and Manning, LLC, to determine whether you qualify for TTS and whether you should elect Section 475 for 2026 or 2027.