Mark-to-Market Topics

Transferring Securities Between Accounts

Non-Dividend Distributions

Section 9100 Relief

Can securities be transferred back and forth between an investment (non-MTM) account and a trading (MTM) account?

This is partially addressed in the Internal Revenue Code and Regulations and depends in no small part on which way the transfer is directed ... from the non-MTM account to the MTM account or vice versa. However, the statutory guidance [IRC Sec 475(f)(1)(B) and Prop Regs Sec 1.475(f)-2(a)] indicates that the investment security should not be identified with the MTM securities. This precludes an investment security being transferred into a trading account or purchased in the MTM trading account with the intent of treating it as an investment security.

The requirement of Sec 475(f)(1)(B) is to clearly identify any security "having no connection" to the trading account and then to segregate that security into a non-trading account [Regs 1.475(f)-2(a)(3)].

Here are some possible reasons to transfer securities between investment and MTM trading accounts:

Unrealized loss exceeding the $3,000 limitation in an investment account - transfer to MTM account in order to deduct the entire loss against ordinary income
Substantial unrealized gain in a MTM account - transfer to investment account to secure long-term or short-term capital gain in order to offset against existing investment losses

So why can a taxpayer not transfer a security with a built-in loss - Scenario 1 - from an investment account to a MTM account during the year and thus bypass the $3,000 net capital loss limititation?

A search of the Internal Revenue Code, Regulations, Tax Court and other "trading tax" sites on the internet reveals no authority cited as to why this cannot be performed. In fact, Sec 475(f)(1)(B) states "If a security ceases to be described in clause (i) - (having no connection to the activities of ... a trader)" the question becomes "How did that investment security "cease" to be an investment security?"
If you look at the MTM implementation process, you will see that any transfers to a MTM trading account subsequent to the electing year violates one of the first steps of electing MTM accounting - the Sec 481(a) adjustment.

A Sec 481(a) adjustment is required for a change in accounting method for the "year of the change" and transferring a security to a MTM trading account would necessitate an adjustment in the basis of the security to FMV, if transferred AFTER the "year of the change". You are already a MTM trader trading inside a MTM account. The Sec 481(a) adjustment is not available subsequent to the change in accounting method year.

So the transfer of a security with an unrealized loss into a MTM trading account would require the security to be marked to market BEFORE its transfer. This means the loss would be recognized as a deemed sale in the investment account then the security transferred into the MTM trading account at its FMV on the date of transfer.

So what about Scenario 2, an unrealized gain in a MTM account being transferred to an investment account? It would be my opinion that the same requirements regarding revocation of the MTM election, except for the approval by IRS, would control. Essentially you are revoking MTM for that individual security. Thus, in that scenario, another "Sec 481(a) adjustment" needs to be made converting that individual security from MTM to the realization method, which would entail the basis adjustment to occur inside the MTM trading account. The gain would stay inside the MTM account.

Bottom-line, this would be an attempt to "have your cake and eat it too!" and would basically be defrauding the government through stock transfer "sleight of hand". You may not get audited but if you did, the accuracy-related and/or the substantial underpayment penalty may apply,

Transfer

Non-Dividend Distributions and MTM

First off, use of Exchange Traded Funds ("ETFs") that make non-dividend distributions ("NDDs") inside a mark to market ("MTM") account somewhat runs contrary to the purpose of a Trader in Securities ("TIS").

It is obviously arguable, but the purpose of NDDs, especially ones that focus on a covered call strategy, is more suited to investments to generate income and retirement accounts rather than capturing profit in response to short-term movements in the market.

Distributions from ETFs may have multiple components, consisting of net investment income, net realized capital gains and return of capital.

These must be separated on your tax return into their respective income categories and the basis in the ETF adjusted.

Distributions may be annual, quarterly or monthly. An annual distribution would not be as difficult to separate the income and basis components but monthly distributions are very difficult, especially if you are "trading" the ETF and you happen to own shares on the date of record.

Further, and most importantly, if the ETF is held at year-end, it must be marked to market based on the adjusted basis of the ETF on the last business day of the year.

Non-dividend distributions are reported on Form 1099-DIV in Box 3. Typically there is detail further down the 1099-DIV on the security that generated the NDD(s). An example of this is an actual 1099-DIV with the final two pages of the NDDs ... note the number of pages and the Box 3 amount. This adjustment took an inordinate amount of time.

The components mentioned - income, capital gains and return of capital - may be determined by downloading the monthly Rule 19a-1 Notice from the website of the ETF. Here is an example of a download of QYLD for the May 19, 2025 distribution. Also shown in this example is an excerpt from IRS Form 8937 filed by the ETF.

The above template shows the purchases, distributions and basis adjustments for QYLD during the dates shown. The distribution date of 5/19/2025 is used in conjunction with the QYLD monthly distribution schedule downloaded from the GlobalX website and the Form 8937. This is a tedious calculation and a template like this should be developed to track your basis in the ETF.

One can only imagine how difficult - and costly - this becomes if you are either trading the ETF itself or reinvesting dividend distributions.

Non-Div Dist

Regs Sec 301.9100 Relief

If there is one question regarding mark to market I receive most frequently, it is "I missed the MTM election deadline ... what can I do? I have read about Sec 9100 relief? Do I qualify?"

Unfortunately, the answer, about 95% of the time, is "Sorry, but you don't qualify for Sec 9100 relief?" which generates the next question ... "Why not?"

There are a couple of triggers that determine my answer in about 30 seconds:

After you missed the election, did you continue to trade?
During that period, have you had losses?

Some background ...

First, there is no "Sec 9100" in the Internal Revenue Code. The proper reference for a mark to market election extension is Treasury Regulations, specifically Regs Sec 301.9100-3.

The extension and granting of relief for missed elections are described in Regs Sec 301-9100-1. The granting of an extension of time to make any election is a matter of legislative grace not a right.

An extension of time to make an election is only available for those taxpayers who were/are eligible to actually make the election. For instance, the MTM Internal Revenue Code section is Sec 475(f). Sec 475(f)(1)(A) states that only "a person who is engaged in a trade or business as a trader in securities" can elect mark to market. So, if you are an investor, based upon trading intent, volume of trading, security holding periods, etc., you are not eligible to make the MTM election.

There are two types of extensions:

Regulatory - an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin
Statutory - an election whose due date is prescribed by statute

Further, there are different time-frames for elections, such as automatic 6-month and 12-month extensions as well as corrective action extensions. I am not going to focus on those but only on the elections regarding the MTM election.

As described on this website, the MTM election is due by the due date of the tax return for the year prior to the year for which it is effective. For example, to make the election for tax year 2027, you will need to file the election by 3/15/2027 (for S Corporations or Partnerships) or 4/15/2027 (for individuals and single-member LLCs), with the tax return or extension for the 2026 return. There is NO extension for the due date of that election.

The MTM election, interestingly, is both a statutory and regulatory election. It is statutory in that It is explicitly authorized by IRC Sec 475(f). However, the method and mechanics for making the election is regulatory or administrative since it is governed by Rev Proc 99-17.

Almost everyone seeking "Sec 9100" relief is familiar with the Vines case [Vines v Commissioner, 126 TC 279 (2006)] in which Vines' CPA failed to recommend/file the MTM election on April 17, 2000 thus making the roughly $27 million in trading losses subject to the net capital loss limitation of $3000 per year. In the "Findings of Fact" the decision referenced the administrative intent of Rev Proc 99-17 saying "The drafters of Rev Proc 99-17 did not want 9100 relief to be available for 475(f) elections." After missing the election with his 1999 tax return on 4/17/2000, Vines retained the law firm of Caplin & Drysdale to prepare the Sec 475(f) election and request section 9100 relief, along with a "protective" Form 3115, which was indeed filed on July 21, 2000. An important point to remember is that Vines traded no publicly-trade securities between April 17, 2000 and July 21, 2000.

The Vines case has a number of details, but suffice it to say that the Internal Revenue Service rejected the amended returns that requested refunds of the tax paid and denied Section 9100 relief upon the filing of a Private Letter Ruling ("PLR") request.

After denial of the PLR, Vines sought remedy in Tax Court. The link above provides the details of fact, the law involved and the Tax Court's holding, which was granted in favor of Vines. These are the major factors in the Tax Court's decision:

Vines acted reasonably and with due diligence - he relied on his CPA for professional tax advice and that advice, in this instant case, was absent. There was a mechanism to decrease Vines' tax liability, the IRC Sec 475(f) Mark to Market Election.
The government's position was not placed in jeopardy. Vines discontinued trading on April 14, 2000 when his brokerage account was liquidated for missing a margin call. Subsequent to that, Vines did not trade until the "late" MTM Election was filed on July 21, 2000 by the law firm. Therefore, the government is in no worse position on July 21 than it was on April 17 since there were no further losses during that time.
The IRS also argued that according to Regs Sec 301.9100-3(c)(2) that the interests of the government are presumed to be prejudiced absent unusual and compelling circumstances not present in this instant case. The Tax Court disagreed that unusual and compelling circumstances are never defined by the Commissioner and must be decided on a case-by-case basis. Thus, the Tax Court determined that unusual and compelling circumstances were present and thus the presumption of prejudice to the government's position is not present.

Therefore, unless your fact situation closely mirrors the facts in Vines, your argument for Regs Sec 301-9100-3 relief will probably not be granted. In my opinion, if you rely on professional tax advice and no MTM election was suggested, you have a shot ... but if you did not stop trading it weakens your position.

Another significant barrier to receiving relief is that a PLR must typically be filed for non-automatic relief, which this would be. As of this writing the user fee for a PLR is $3,450 for taxpayers with less than $400,000 of gross income and it can increase to $14,500 and this does not include CPA and attorney fees, which could easily double or triple that amount.

Sec 9100