mark-to-market_mtm_election [CapiPedia]

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======Mark-to-Market (MTM) Election======
Mark-to-Market (MTM) Election is a tax accounting method, primarily available in the United States, that qualifying active traders can choose. By making this election with the [[Internal Revenue Service (IRS)]], a trader agrees to treat their trading assets as if they were sold for their [[fair market value]] on the final business day of the tax year. The result? All the year's gains and losses—both realized (from actual sales) and unrealized (the "paper" profits or losses on securities still held)—are reported on that year's tax return. This fundamentally changes the tax treatment of trading activity. Instead of being treated as [[capital gains]] and losses, they become [[ordinary income]] and losses. This election is a serious commitment designed for individuals who qualify as a [[trader in securities]] in the eyes of the IRS, a status that requires frequent, substantial, and continuous trading activity. It is generally unsuitable for long-term investors.
===== Why Would a Trader Make This Election? =====
This choice is a double-edged sword, offering significant benefits in some scenarios and painful drawbacks in others. It's a trade-off between simplifying rules and potentially paying higher tax rates.
==== The Upside: Potential Tax Advantages ====
For a qualifying trader, the MTM election can be a powerful tool, especially in a losing year.
  * **Bye-Bye, Capital Loss Limits:** Normally, investors can only deduct a maximum of $3,000 in net [[capital loss]] against their ordinary income each year. With the MTM election, this limit vanishes. A trader with a $100,000 net loss for the year could potentially deduct the entire amount against other income (like a spouse's salary), leading to massive tax savings.
  * **Freedom from the Wash Sale Rule:** The MTM election completely exempts a trader from the dreaded [[wash sale rule]]. This complex rule prevents you from claiming a loss on a security if you buy a substantially identical one within 30 days before or after the sale. For active traders who might move in and out of the same stock frequently, tracking wash sales is a nightmare. MTM wipes that slate clean.
==== The Downside: The Tax Man Always Gets His Cut ====
The benefits come at a steep price, particularly when the market is climbing.
  * **Hello, Higher Tax Rates:** The flip side of ordinary loss treatment is ordinary income treatment. All net gains are taxed at ordinary income tax rates, which are typically much higher than the preferential rates for long-term capital gains. A successful trader will end up handing over a much larger slice of their profits to the government.
  * **The End of Tax Deferral:** This is the killer for investors. Value investors cherish the ability to hold a winning stock for years, letting it compound without paying any tax until the day they sell. MTM destroys this advantage. You must pay tax on your unrealized "paper" gains every single year. This acts as a significant drag on long-term compounding.
  * **A Sticky Decision:** Once you make the MTM election, you're stuck with it. Revoking it requires formal permission from the IRS, which is not guaranteed. It's not a strategy you can toggle on and off depending on whether you had a good or bad year.
===== MTM Election vs. Value Investing: A Tale of Two Philosophies =====
The MTM election crystalizes the difference between a trader and an investor. The two approaches are fundamentally incompatible, especially from a value investing perspective.
A value investor, in the tradition of [[Benjamin Graham]], thinks in decades. Their goal is to buy wonderful companies at fair prices and hold them, allowing the value to compound over the long term. Tax deferral is a massive, unspoken partner in this process. By not paying tax on gains year after year, you have a larger capital base working for you.
The MTM election is the philosophical opposite. It's a tool for someone whose business is short-term price movement, not long-term business ownership. By forcing the annual recognition of gains, it systemically erodes the compounding power that is the bedrock of value investing.
//The bottom line for a Capipedia reader:// If you consider yourself an //investor//, the Mark-to-Market election is almost certainly not for you. It's a specialized tool for high-frequency traders, and its core feature—the destruction of tax deferral—is poison to a long-term, value-oriented strategy.