The $50,000 Tax Mistake Active Traders Keep Making (And How to Fix It)
If you’re an active trader generating significant volume and profits, you’ve likely heard about “mark-to-market” (MTM) accounting under IRC Section 475(f). But is it right for you? The answer depends on your trading style, profit levels, and whether you’re willing to give up long-term capital gains treatment for other substantial benefits.
Let me break down the real-world math and decision framework I use with clients.
The Core Tradeoff
Mark-to-Market gives you:
No wash sale restrictions
Full expense deductibility
Ordinary loss treatment (no $3,000 cap)
Clean year-end accounting
But you surrender:
Long-term capital gains treatment (everything becomes ordinary income taxed at up to 37%)
For buy-and-hold investors, this tradeoff makes no sense. For active traders who rarely hold positions beyond weeks or months, it can be a game-changer.
How Mark-to-Market Actually Works
Under MTM election, on December 31 each year:
All open positions are “deemed sold” at fair market value
Unrealized gains/losses are reported as ordinary income/loss
Positions get a new cost basis equal to December 31 price
You continue holding positions into the new year (no forced selling)
Example:
You bought QQQ at $602.22 on October 15
It closes at $623.89 on December 31
MTM treatment: You report $21.67/share ordinary income for that tax year, even though you didn’t sell
Your new cost basis becomes $623.89 for the following year
When you sell at $640 in February, you report only $16.11/share additional income
Regular Trader/Investor Taxation
Without MTM election, you operate under standard capital gains rules:
Short-term gains (<1 year holding): Ordinary income rates (up to 37%)
Long-term gains (>1 year holding): Preferential rates (0%, 15%, or 20%)
Wash sale rules apply: Can’t claim loss if you rebuy “substantially identical” security within 30 days
Loss limitations: Capital losses only offset capital gains plus $3,000 per year
Expense limitations: Trading expenses subject to 2% AGI floor (essentially non-deductible for most)
The Real Benefits of MTM: Beyond Tax Rates
1. Wash Sale Freedom
This is huge for systematic traders. Under regular rules, if you:
Sell QQQ for a $5,000 loss on November 15
Buy it back on December 1 (within 30 days)
Result: You cannot deduct the $5,000 loss until you fully exit the position
For traders who scale in/out of positions or get stopped out and re-enter, wash sales create a recordkeeping nightmare and defer losses indefinitely.
MTM eliminates this entirely. No wash sale rules apply.
2. Full Expense Deductibility
Regular traders face severe limits on deducting expenses:
Data feeds (TradingView, Bloomberg, etc.)
Home office
Professional education
Trading software and platforms
Market research subscriptions
These are either non-deductible or subject to 2% AGI limitations that make them worthless for most taxpayers.
MTM traders (operating through an entity like an S-Corp or LLC) can deduct these as ordinary business expenses against trading income. If you’re spending $15,000-30,000 annually on trading infrastructure, that’s $5,000-10,000+ in tax savings.
3. Ordinary Loss Treatment
The $3,000 capital loss limitation can be devastating. If you have:
$150,000 in trading losses
$50,000 in other income
Under regular rules: You can only deduct $3,000 this year, carrying forward $147,000 (taking 49 years to fully utilize).
Under MTM: The full $150,000 ordinary loss offsets your other ordinary income immediately (subject to basis limitations in entity structures).
4. Simplified Recordkeeping
With automatic December 31 marking, you don’t need to track every wash sale, adjust basis constantly, or maintain complex spreadsheets. Your positions get “reset” annually.
The Tax Rate Reality Check
Here’s where you need to run the numbers honestly.
Scenario 1: Pure Short-Term Trader
You rarely hold beyond 3-6 months
90%+ of gains would be short-term anyway
Tax difference between MTM vs Regular: Minimal (both taxed as ordinary income)
MTM advantage: Massive (wash sales, expenses, loss treatment)
Scenario 2: Mixed Holding Periods
You hold some positions 12+ months for long-term treatment
40% of gains are long-term, 60% short-term
Tax difference: More significant
Analysis needed: Does 20% tax rate on 40% of gains outweigh MTM benefits?
The Math: Let’s say $200,000 in annual trading gains:
40% long-term ($80,000) × 20% = $16,000 tax
60% short-term ($120,000) × 37% = $44,400 tax
Total regular trader tax: $60,400
Under MTM:
100% ordinary ($200,000) × 37% = $74,000 tax
Tax cost increase: $13,600
But add back:
Wash sale losses you couldn’t claim: +$10,000
Deductible expenses at 37% rate: +$8,000
Net MTM cost: Minimal or possibly favorable
Scenario 3: Buy-and-Hold Investor
Most positions held multiple years
80%+ long-term gains
MTM makes no sense: You’d convert 20% gains into 37% gains for no benefit
Who Should Consider MTM?
Strong candidates:
Active traders with 500+ trades per year
Average holding period under 6 months
Significant trading expenses ($15,000+)
History of wash sale complications
Swing traders, momentum traders, systematic strategies
Trading profits $200,000+ (makes entity structure costs worthwhile)
Poor candidates:
Long-term investors (even active ones)
Options income strategies with covered calls (often held 12+ months)
Anyone regularly achieving long-term gains
Casual traders with <100 trades/year
Small accounts where entity costs exceed tax benefits
Implementation Considerations
Entity Structure
MTM works best with a business entity:
S-Corporation: Common choice for serious traders
Payroll tax savings on profits above “reasonable compensation”
K-1 income flows to personal return
Added complexity: payroll, corporate returns, state franchise tax
LLC (taxed as partnership or S-Corp): Simpler formation
Same MTM benefits
Less payroll compliance if single-member
Sole proprietorship: Simplest, but loses some entity benefits
Election Timing
Critical deadlines:
New entity: Election must be made with timely-filed return (including extensions)
Existing entity: Election due by April 15 of the year BEFORE it takes effect
New traders: Special relief available for first-year traders
This is not retroactive. If you want MTM for 2026, the election for an existing entity needed to be filed by April 15, 2025.
Revocation Difficulty
Once you elect MTM, you cannot easily revoke it. You need IRS consent, which is rarely granted except for:
Material change in circumstances
Retirement from trading
Significant change in trading strategy
Consider this a long-term commitment.
My Decision Framework
Walk through this analysis:
Step 1: Calculate what percentage of your gains are currently long-term
If >40%, MTM probably doesn’t make sense
If <20%, MTM likely beneficial
If 20-40%, need deeper analysis
Step 2: Quantify wash sale impact
Review last 2 years of trades
How many wash sales occurred?
What losses were disallowed or deferred?
Step 3: Calculate deductible expenses
Data feeds, platforms, education, home office
Under MTM: multiply total by your marginal rate (37%)
This is your annual tax savings from expense deductibility alone
Step 4: Evaluate loss protection value
Have you had years with significant losses?
Could you use ordinary loss treatment against other income?
Are you subject to the $3,000 limitation currently?
Step 5: Entity cost-benefit
S-Corp costs: $2,000-4,000 annual compliance
Tax savings from payroll tax reduction: typically $8,000-15,000 on $100,000+ profits
MTM-specific CPA: $3,000-5,000 annually
Step 6: Three-year projection
Model your likely tax under both scenarios for next 3 years
Include all factors: rates, wash sales, expenses, entity costs
If MTM saves $10,000+ annually, it’s likely worth it
Practical Example: Active Momentum Trader
Let me show you a real-world scenario (using hypothetical numbers):
Trader profile:
Focuses on momentum stocks and ETFs (QQQ, growth stocks, sector rotation)
Trades technical breakouts and pullback entries
Average holding period: 4-10 weeks
300 round-trip trades annually
$250,000 in gross trading gains
$20,000 in trading expenses (data, education, home office)
Historically 85% short-term, 15% long-term gains
Regular taxation:
Short-term gains: $212,500 × 37% = $78,625
Long-term gains: $37,500 × 20% = $7,500
Wash sale loss deferrals: ~$12,000 (cannot claim)
Trading expenses: $0 (non-deductible)
Total tax: $86,125
MTM taxation (via S-Corp):
All gains: $250,000 × 37% = $92,500
Less: Deductible expenses: $20,000 × 37% = -$7,400
Recovered wash sales: $12,000 × 37% = -$4,440
S-Corp payroll savings (on $150K above salary): -$11,250
Entity compliance costs: +$4,000
Total tax: $73,410
Annual savings: $12,715
Beyond Tax Elections: The Complete Trading Entity Strategy
While your trader tax CPA handles MTM elections and tax compliance, there are complementary planning opportunities that most traders overlook when setting up their S-Corp or LLC structure.
Retirement Planning for Trading Entities
Once you’re operating through an entity, you have access to significantly larger retirement contribution limits:
SEP IRA:
Contribute up to 25% of compensation (20% for self-employed)
Maximum $69,000 for 2024 (adjusted annually)
Simple to administer, low maintenance
Ideal for solo traders or small teams
Solo 401(k):
Employee deferrals: $23,000 ($30,500 if age 50+)
Employer profit sharing: up to 25% of compensation
Combined maximum: $69,000 ($76,500 if age 50+)
Allows Roth contributions
Can include loan provisions
Example: A trader with $200,000 in S-Corp profits could:
Pay themselves $100,000 salary
Contribute $23,000 employee deferral + $25,000 profit sharing = $48,000 to Solo 401(k)
Tax deduction at 37% = $17,760 in tax savings
Plus decades of tax-deferred growth
Many traders focus solely on reducing current-year taxes but miss the opportunity to build significant tax-advantaged wealth while they’re generating strong trading returns.
Key Person and Business Continuation Insurance
If your trading operation is your primary income source, you’re running an uninsured business risk. Consider:
Disability Insurance for Traders:
Own-occupation coverage that pays if you cannot trade
Critical for systematic traders whose methodology requires daily attention
Protects income stream if health issues prevent active trading
Key Person Life Insurance:
Provides capital to wind down positions orderly if something happens to you
Can fund buy-sell agreements if you have trading partners
Covers entity debts and obligations
Business Overhead Expense Insurance:
Covers fixed costs (office, data feeds, staff) if you’re disabled
Keeps entity operational during recovery period
The math is straightforward: if you’re generating $200,000+ annually from trading, protecting that income stream with $3,000-5,000 in annual premiums is prudent risk management.
My Role in This Process
As a financial advisor, I don’t prepare MTM elections or file tax returns - that’s what your trader tax CPA does.
What I help active traders with:
Retirement plan design and implementation - selecting the right plan structure for your entity, coordinating with your CPA on contribution limits, and managing the investments
Insurance analysis - evaluating disability, life, and business insurance needs specific to trading operations
Entity coordination - working alongside your CPA and attorney to ensure retirement and insurance strategies align with your tax structure
Investment management - for capital outside your active trading operation that needs different management
The goal is a complete picture: your CPA optimizes your tax structure, I help you protect and grow wealth systematically within that structure.
If you’re considering MTM election or already operating a trading entity, I’m happy to discuss how retirement planning and insurance fit into your overall strategy. No obligation - just a conversation about whether these pieces make sense for your situation.
Bottom Line
Mark-to-market election is a powerful tool for the right trader. If you’re actively trading with short holding periods, experiencing wash sale headaches, and have significant trading expenses, the benefits can far exceed the cost of losing long-term capital gains treatment.
But it’s not a one-size-fits-all solution. Buy-and-hold investors and those regularly achieving long-term gains should stay with regular taxation. The key is understanding your actual trading patterns, running the numbers honestly, and making a decision based on data rather than assumptions.
Time-Sensitive Considerations:
If you’re reading this in late 2025:
The MTM election deadline for existing entities to qualify for 2026 has already passed (April 15, 2025)
However, you can still elect MTM for 2027 by filing before April 15, 2026
New entities formed in 2026 have until their tax filing deadline (with extensions) to make the election
Year-end is the perfect time to assess your 2025 trading results and model what 2026-2027 would look like under both structures
Don’t let another year of wash sales, lost deductions, and capped losses go by without at least running the analysis. The cost of inaction for a $200,000+ trader can easily exceed $10,000-15,000 annually.
Your Next Steps:
Tax structure analysis: Connect with a trader tax specialist (start with GreenTraderTax.com) to evaluate whether MTM makes sense for your situation and get the election filed properly
Retirement and insurance planning: Once you’ve determined your entity structure, let’s discuss how to maximize the retirement planning opportunities and protect your trading income through proper insurance coverage
Complete strategy: The most successful traders I work with have all three pieces working together - optimal tax structure (via their CPA), maximized retirement contributions, and protected income streams
The difference between a trader who only focuses on entries and exits versus one who has the complete financial infrastructure in place can be six figures over a decade. Not from better trade selection - from better structure.
Contact Us Today
Ready to discuss how retirement planning and insurance strategies can complement your trading entity structure?
Treveri Capital LLC works with active traders to build comprehensive financial strategies that go beyond just making trades. Whether you’re considering MTM election, already operating through an S-Corp, or just looking to optimize your current setup, let’s have a conversation about your specific situation.
Schedule a complimentary consultation:
No obligation - just an honest assessment of whether these strategies make sense for you
We’ll review your trading volume, entity structure, and current retirement planning
Discuss disability insurance and business protection specific to trading operations
Coordinate with your trader tax CPA to ensure everything works together seamlessly
Email or call Treveri Capital to set up a time to talk. Because the best trade you make might not be in the market - it might be in how you structure everything around it.
The wash sale angle here is huge for anyone doing systematic entries and exits. Converting that 20% LTCG rate into 37% ordinary sounds brutal on paper, but when you factor in the wash sale nightmare and the $3K capital loss cap, the math flips fast. I've watched friends carry forward six-figure losses for years while stil paying taxes on W2 income they could've sheltered.