We have written about this before. Read more.
In terms of a late election, there are generally 3 options.
1. 19100 Relief
If a taxpayer fails to file a timely election, all is not lost. Regs. Sec. 301.9100-(3)(c) allows taxpayers to seek extensions for certain elections, including the election to use the mark-to-market method of accounting. This is hard to get and costs over $10k.
 Requirements for Relief -
To obtain Sec. 9100 relief, the taxpayer must meet two tests: (1) the taxpayer acted reasonably and in good faith and (2) granting relief will not prejudice the government’s interests. The regulations provide that the taxpayer is deemed to have acted in good faith if he or she fails to make the election in reliance on the advice of the IRS or a qualified tax professional. Alternatively, the IRS will grant relief under the following circumstances:
- The taxpayer exercised reasonable diligence but was unaware of the need for the election;
- The taxpayer requests relief before the failure to make the election is discovered by the IRS; or
- The taxpayer failed to make the election due to events beyond his or her control.
The prejudice condition tries to protect the government’s interests. Those interests are prejudiced if granting relief will lower the taxpayer’s tax liability or if the election affects a year closed by the statute of limitation.
2. New Entity Strategy:
The most effective "workaround" for a late election is often by forming a new legal entity (like an LLC or Partnership), which has 75 days from its inception to make a timely MTM election. The new entity must "elect" Section 475 internally via a books-and-records resolution within 75 days of formation. Only trading activity occurring within that new entity after the election date will qualify for MTM (ordinary) treatment; losses incurred personally before the entity was formed remain capital losses.
3. Form 3115 with "Automatic" Consent -
Form 3115, Application for Change in Accounting Method. Technically this is not a late election, you are submitting the form under the IRS's "automatic consent" procedures, which have specific, non-negotiable conditions. Assuming that you meet the trader status test, implement the change using a "cut-off" method. This is the most critical and misunderstood aspect:
- You do NOT get to re-calculate prior years.You recognize no "Section 481(a) adjustment" (the cumulative impact of the change).
- You simply begin using MTM starting on the first day of the year of change.All positions held at the beginning of that year are considered as if they were acquired at their fair market value on that date. Their historical, unrealized gains/losses are locked in and will only be recognized when you eventually sell the position.
Â
