QUESTION: How do you elect Mark-to-Market accounting?
ANSWER: First, you must be considered a trader by definition, as the Mark-to-Market accounting election isn’t available to investors. You also need to be proactive, and decide ahead of time what you want. To make the election for the current tax year, you must file a statement with your tax return for the previous year. That means by April 15th.
If you miss your deadline, you can’t elect Mark-to-Market accounting until the next year, unless you establish a legal entity. Then, you’ll have two months from opening to notate in your meeting minutes that Mark-to-Market accounting is your accounting method of choice.
Once you’ve properly elected Mark-to-Market accounting, fill out Form 3115, an Application for Change in Accounting Methods, and submit it when you file your current years tax return.
Within Form 3115, you’ll find a Section 481(a) adjustment, which is a dollar amount based on your change in accounting methods. When you make the MTM election, you’ll adjust the securities to market value at the beginning of the year. The difference between last years ending balances, which were recorded at cost, and the fair market value at election is your 481(a) adjustment. If the adjustment is less than $25,000, you may deduct the full amount on your tax return. If it’s greater than $25,000, deduct one-fourth of the value each year for the next four years.
Please note if you elected the Mark-to-Market accounting method on your legal entities first tax return a 3115 is not required.