26 U.S.C. § 475 — Mark to market accounting method for dealers in securities

(a) General rule. A dealer in securities must follow special rules for the securities they hold: Any security that is the dealer's inventory must be counted at its fair market value. Any other security the dealer still holds at the end of the tax year is treated as if it were sold at fair market value on the last business day of the year, and any gain or loss from that must be counted for that year. Later, when the security is actually sold, the earlier gain or loss already counted is subtracted out so it isn't double-counted. The Treasury Secretary^* can make regulations about when exactly this applies.

(b) Exceptions. This mark-to-market rule does not apply to: a security held for investment; certain securities (or an obligation to acquire one) that the taxpayer^* originates or acquires in the ordinary course of business and does not hold for sale; or a security that is a hedge protecting a security or position not itself subject to this rule. To use one of these exceptions, the dealer must clearly mark the security in its records, before the end of the day it was acquired, as falling into that exception. If a security later stops qualifying for an exception, the mark-to-market rule applies to any value changes after that point. Regulations may also limit the "held for investment" exception for a security described elsewhere in this section.

(c) Definitions. A "dealer in securities" is a taxpayer who regularly buys securities from, or sells them to, customers in the ordinary course of business, or who regularly enters into or ends security positions with customers. "Security" is defined broadly to include: stock^* in a corporation^*; a partnership^* or trust interest that is widely held or publicly traded; notes, bonds, debentures, or similar debt; interest rate, currency, or equity notional principal contracts; and derivative interests (like options, forwards, or short positions) in any of those; plus a residual category for a hedge position clearly identified in the dealer's records, that isn't already one of the above. A "hedge" is a position that manages the dealer's risk from interest rate, price, or currency changes, including one reasonably expected to become a hedge within 60 days. A special rule says that "nonfinancial customer paper" — debt arising from selling nonfinancial goods or services, held continuously by the seller (or a related party) since it was issued — is not treated as the kind of security eligible for the trade-or-business exception in (b).

(d) Special rules. Certain other tax rules (sections 263(g), 263A, and 1256(a)) do not apply to securities covered by subsection (a), and the wash-sale rule (section 1091) does not apply to losses recognized under this section (section 1092 applies instead). If a taxpayer wrongly identifies a security as exempt when it is not, or fails to properly identify a hedge position when required, the mark-to-market rule applies to it anyway — except that any loss is recognized only up to the amount of gain already counted on it under this section. Gains and losses recognized under this section are generally treated as ordinary income or loss, including gains or losses recognized just before year-end on a security that would otherwise have been marked to market — except this ordinary-income treatment does not apply during a period when the security qualifies for the investment exception, is held by someone acting outside their role as a dealer, or was improperly identified.

(e) Election for dealers in commodities. A dealer in commodities may elect to have this same mark-to-market approach apply to the commodities they hold, the same way it applies to securities held by securities dealers. "Commodity" is defined to include actively traded commodities, notional principal contracts on them, derivative interests in them, and a residual hedge-position category similar to the one for securities. Once made, this election continues for all future years unless revoked with the Treasury Secretary's consent, and it does not require the Secretary's consent to make in the first place.

(f) Election for traders in securities or commodities. A person in the trade or business^* of trading securities can elect to mark those securities to market at year-end the same way a dealer does, with a similar exception for securities unconnected to the trading business (if properly identified) and a rule coordinating with section 1259 (about constructive sales). Similar rules from subsections (b)(4) and (d) apply, except that the ordinary-income rule in (d)(3) does not apply for certain self-employment and partnership tax purposes. A trader in commodities can make a parallel election. Both elections can be made separately for each trade or business, without the Secretary's consent, and continue for all future years unless revoked with the Secretary's consent.

(g) Regulatory authority. The Treasury Secretary must issue regulations needed to carry out this section, including rules to: stop taxpayers from using year-end transfers, related parties, or similar tricks to avoid this section; apply this section to a hedge that can't be tied to one specific security, position, right to income, or liability; and stop taxpayers from misusing the nonfinancial-customer-paper rule in (c)(4) to dodge this section for a receivable that is really their inventory.