Making the Mark-to-Market Election
(part 2)


Further guidance on making the mark-to-market election.

At this point you should have completed the first part of the mark-to-market election requirements, as described on the preceding page. Don't try to follow the procedures here until you've followed the earlier procedures!

Election, Part Deux

You were waiting for the fun part, and here it is. When you file your return for the year the election is effective, you need to attach Form 3115. You also have to send a copy of Form 3115 to the IRS national office. Be sure to get the current version of this form. As of this writing, it is the December, 2003 version.

If you have Adobe Acrobat Reader, you can use these links to obtain Form 3115 and the instructions.

Form 3115 is a delightful concoction of arcane questions, many of which only a tax professional can answer. The good news: only the first three pages of this eight-page monster apply to you. Here are some tips in grappling with Form 3115 (based on the most current version of the form when this was written):

  • The form asks you for the "district director's office having jurisdiction." The IRS did away with district directors years ago, so I assume you're supposed to leave that box blank.
  • The type of accounting method change is "financial products."
  • The answer to question 1 in Part 1 is "yes," and the citation is "Rev. Proc. 99-17." Note that because you're filing under an automatic procedure, you don't have to pay a user fee with this form.
  • The answer to question 2 is "no."
  • While this isn't entirely clear, it appears that when you make this election you are changing your overall method of accounting.
  • The section 481(a) adjustment (Part III of the Form) is the difference between the amount of income you would have reported without the election and the amount you report with the election. In other words, it's the gain or loss you would have on a "deemed sale" of your securities on December 31 of the last year before your election took effect. If you didn't hold any securities at the end of business on December 31, this amount is zero. If you held securities on that date but the gain or loss was small, it probably makes sense to simplify things by checking "yes" on line 21a.

You need to attach a statement something like the following:

John Smith
SSN 123-45-6789
Attachment to Form 3115

In accordance with Rev. Proc. 99-17 and section 475(f) of the Internal Revenue Code, the taxpayer filed an election with his 1999 income tax return to use the mark-to-market method of accounting in connection with his trade or business of trading securities, effective beginning with the taxable year commencing January 1, 2000. This method of accounting will be used for the taxpayer's books and records and financial statements.

If you've been paying attention, you know you need to file this form a year after you filed the original election. When electing for the year 2005, the original election is filed with your 2004 return in April 2005, but Form 3115 is filed with your 2005 return in April 2006.

What Now?

Sign the form and attach it to your tax return. In addition, no later than the date you file your tax return, send a copy of Form 3115 and the attached statement to the address indicated in the instructions for this form.