Mark-to-Market Example
We will present two broad overview examples. One will exhibit the tax benefits of the MTM election whereas the second will show the potential detrimental impact of the election.
Note: These are two separate examples shown using the same security (AAPL) so each example is a stand-alone scenario, not cumulative.
Example 1: Trader purchases 100 shares of TSLA on 7/19/2023 then sells on 1/30/2024
Example 2: Trader purchases 100 shares of TSLA on 6/17/2024 then sells on 3/10/2025
Assumption: Trader made a timely and effective MTM election for the tax year 2024
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Note: This is not a recommendation to trade TSLA and is presented only for illustrative purposes.
Note ... the Pros and Cons
I have used a real-life example trade for the MTM Election because it provides the perfect scenario for BOTH a positive and negative adjustment
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It also fully illustrates that the Mark-to-Market Election decision is not to be taken lightly.
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Note that the opposite market movement could also occur, especially in uncertain, volatile times.
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Essentially, the trader is required to mark-to-market all gains but when the tax return comes due and the market has declined, there may be a cash shortage if depending on the previously marked to market securities to pay the tax.
Example 1a
Deemed sale results in a significant loss. For a MTM Trader this is reported on Form 4797 Part II and Form 3115.
Example 1b
Actual sale results in a less significant loss. For a MTM Trader this is reported just on Form 4797 Part II as regular MTM trading for the year.
Example 2a
Deemed sale results in a significant gain. For a MTM Trader this is also reported on Form 4797 Part II as a "Year-End MTM Adjustment".
Example 2b
Actual sale results in a significant loss. For a MTM Trader this is also reported on Form 4797 Part II as regular MTM trading for the 2025 tax year.
Basis Adjustment
In Example 1b, the new basis for the shares is adjusted for the loss recognized. Therefore, new basis per share is $248.48 per share and the holding period is short-term (Example 1b).
Similarly, in Example 2a, new basis is adjusted for the gain recognized. Thus, the new basis per share is $403.84 per share and the holding period is again, short-term (Example 2b).
This is the Form 4797 for the above transactions and ONLY those transactions in order to illustrate how the transactions actually track to the tax return. Obviously there will be many more transactions listed on a separate supplemental statement since MTM trading requires a significant number of trades.​​​​​​​​​​​​​​​​​
Conclusion
As you can see, there is a tax benefit when a loss can be recognized. You recognize the 4,652 loss at the beginning of 2024 along with the subsequent trade and at a marginal rate of 28% that translates to a $2,884 tax savings.
However, there is the potential for additional tax liability based on the deemed sale at a higher price. If you do not have the funds to pay the tax you may need to sell a position you do not want to sell.
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For instance, the second trade (Example 2a) results in a tax due of $6,128 for 2024 - although modified by the loss - and you do not have the proceeds from the trade since that position represents a "deemed" sale.
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Most of my clients are looking for a tax savings and MTM can provide that in a big loss year, but the opposite can also be true, so, as mentioned above, this is an election not to be made just looking for a loss. And remember, the term of ALL transactions is short-term taxed as ordinary income.