IRC Section 475 refers to Section 475 of the Internal Revenue Code, which permits certain taxpayers, primarily securities and commodities dealers, to elect “mark-to-market” accounting for their inventories, including certain financial instruments. This alters how gains and losses are recognized.
Mechanism
Under this provision, eligible traders recognize gains and losses on their trading assets as if they were sold at fair market value on the last day of the tax year, rather than waiting for actual disposition. This rule eliminates the wash sale rule and character conversions for securities, simplifying tax treatment.
Methodology
For crypto traders and institutions, strategically electing Section 475 can simplify tax reporting by treating all positions as ordinary income or loss, bypassing complex capital gains rules and loss limitations. This requires meticulous record-keeping and a demonstrable pattern of active trading activity to qualify as a “trader” rather than an “investor.”
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