Clay Littlefield
Don’t Miss the 2010 Section 475(f) ‘Trader’ Election Deadline

Advantages for a securities or commodities trader for making a section 475(f) election to mark its securities or commodities positions to market and the procedural difficulties of doing so if the election deadline has elapsed.

March 11, 2010
by Clay Littlefield, JD

Back in 2001, as an attorney with the Internal Revenue Service (IRS), I received numerous calls and a few private-letter ruling inquiries from tax professionals on making late elections for their clients under section 475(f) for “traders” in securities. For eligible taxpayers who make timely and proper elections under section 475(f), all securities positions (or commodities positions) held during that election year and subsequent years are treated as sold for their fair market values at the close of the taxable year (i.e., “marked-to-market”) and any actual or deemed gains and losses are characterized as ordinary income or loss. Thus, where significant trading losses are expected to be incurred, a principal benefit of making a section 475(f) trader election is the ability to characterize these losses as ordinary rather than capital. This became a popular strategy around 2001, when the “dot.com bubble” had officially popped (remember pets.com and their sock-puppet mascot?) and many professionals who were either moonlighting or had quit their jobs to pursue securities “day-trading” careers were throwing in the towel and focusing on their original careers after suffering significant trading losses.

Election Procedures

Assuming these requesting taxpayers qualified as “traders” eligible to make the election for tax purposes, the initial roadblock to these requests was that the election deadline had passed. Rev. Proc. 99-17 provides the exclusive procedure for making a securities or commodities trader election under Section 475(f). Section 5.03 of the Rev. Proc. requires that to make a section 475(f) election for taxable years beginning on or after January 1, 1999, the taxpayer must file a statement containing certain required information no later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year, which must be attached to either that return or to a request for an extension of time to file that return. Thus, for existing taxpayers qualifying as securities “traders” in 2000, this meant that in order to have timely made the election, the required statement must have been attached to their original 1999 federal income tax returns or timely extension requests.

These special procedures and filing deadlines came as a surprise to many tax advisors and return preparers who were either:

  1. Completely unaware of the Rev. Proc.’s requirements or
  2. Were generally aware that a procedure existed, but believed they could make the election on the federal income tax return for the applicable taxable year (i.e., the 2000 return) or with the filing of the correct federal income tax return, but on the extended filing due date.

Upon realizing that the election deadline had passed, many taxpayers and their tax advisors pursued late regulatory election relief from the IRS under Reg. section 301.9100-3. Typically, such relief will be granted if the facts and circumstances show that the taxpayer acted reasonably and in good faith and the granting of the relief will not prejudice the interests of the government. For this purpose, a taxpayer is deemed to have acted in good faith in certain circumstances, including where the taxpayer reasonably relied on a qualified tax professional and the tax professional failed to make or advise the taxpayer to make, the election (e.g., where the advisor falls on its sword and takes the blame).

Hindsight and Late Elections

Despite this, the vast majority of these election extension requests were denied, primarily based on the theory that permitting such a late election would allow the impermissible use of “hindsight.” Under Reg. section 301.9100-3(b)(3)(iii), a taxpayer is deemed to have not acted reasonably and in good faith with respect to an accounting method regulatory election if the taxpayer uses hindsight in requesting the late election relief. For this purpose, the regulations explain that this impermissible hindsight is present if specific facts have changed since the due date for making the election that make the election advantageous to a taxpayer. In such a case, the IRS will not generally grant relief unless the taxpayer provides strong proof that the decision to make the late election does not involve hindsight. This strong proof of lack of hindsight is a pretty high hurdle, especially when the taxpayer requesting the relief has significant trading losses.


At a recent American Bar Association meeting, IRS officials explained that they are once again seeing these late election requests, in part due to the recent and significant market corrections of the past couple of years. A private-letter ruling released on the last day of 2009 (PLR 200953006) involved a taxpayer who traded securities from his home office for a period of years and who regularly consulted his CPA for tax advice and to prepare his tax returns. Apparently, this taxpayer learned of the Section 475(f) election after contacting the IRS to discuss his financial issues, especially with respect to large trading losses he expected to incur that year. According to the facts of the ruling, the taxpayer then approached his CPA about the election, who stated he had heard of the election but was not quite sure how it worked. In requesting 9100 relief, this CPA provided a single-line affidavit stating that he was not aware of the provisions of Section 475 of the Code. The IRS denied the taxpayer’s request, stating that the taxpayer had failed to demonstrate that his decision to seek the late election relief did not involve hindsight. In support of this hindsight conclusion, the ruling states that allowing a late election “would provide the taxpayer with more than x months of hindsight to review and consider the results of his securities trading transactions and whether he would benefit by making the election.”


If you have clients who are relatively active in stock or commodity investing, take a few minutes to read Revenue Procedure 99-17. This will avoid having to potentially admit to a client that while you’ve heard about the election, you don’t really know how it works.

Recognize that this election is only available to taxpayers who are “traders” in securities and not mere “investors,” for federal income tax purposes. The line between an “investor” and a “trader” is far from clear and is always based on a taxpayer’s particular facts and circumstances. Generally speaking, whether a taxpayer’s investment activities rise to the level of a trade or business is based, in part, on the taxpayer’s intent, the nature of the income derived and the frequency, extent and regularity of its transactions.

For those CPAs whose clients do qualify as “traders” in securities or commodities for federal income tax purposes, take the opportunity when discussing their 2009 filing obligations to also explain the election and its consequences. While Revenue Procedure 99-17 attempts to limit the use of too much hindsight in making the election, it implicitly allows the use of hindsight for realized or built-in trading gains and losses for the short period between the beginning of the taxable year and the due date of the election.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Clay Littlefield, JD, partner with Alston & Bird LLP, Charlotte. 704 444-1440. Littlefield previously served in the Financial Institutions and Products Division of IRS Chief Counsel.