If you are a securities trader, you can make a “mark-to-market” election under section 475(f) of the tax code. Under this election, a trader reports all gains and losses from securities held in connection with a trading business as ordinary income (or loss), including securities held at the end of the year. Securities held at the end of the year are "marked-to-market" by treating them as if they were sold (and reacquired) at fair market value on the last business day of the year.
Generally, a securities trader has to make this election by the due date of the tax return for the year before the year in which the election becomes effective. In the year the election becomes effective, a trader reports all gains and losses from securities held in connection with the trading business, including securities held at the end of the year, in Part II of Form 4797.
If as a trader, you also hold securities for investment, you must identify those securities as investment securities in your records on the day they are acquired (for example, by holding the securities in a separate brokerage account). Securities held for investment are not marked-to-market.
Not Subject to Self-Employment Tax
Even though a trader is considered to be in the business of trading securities, gains or losses from the sale or disposal of securities are not taken into account when figuring net earnings from self-employment on Schedule SE. This is true regardless of whether a trader reports his or her gains and losses on Schedules D or Form 4797.
Investment Interest and Expenses
The limitation on investment interest expense that applies to investors (who must itemize deductions) does not apply to interest paid or incurred in a trading business. A trader reports interest and other expenses (except for commissions and other costs of acquiring or disposing of securities, which are used to figure the gain or loss) from a trading business on Schedule C (instead of Schedule A).