§ 475. Mark to market accounting method for dealers in securities
(a)
General rule
Notwithstanding any other provision of this subpart, the following rules shall apply to securities held by a dealer in securities:
(1)
Any security which is inventory in the hands of the dealer shall be included in inventory at its fair market value.
(2)
In the case of any security which is not inventory in the hands of the dealer and which is held at the close of any taxable year—
(A)
the dealer shall recognize gain or loss as if such security were sold for its fair market value on the last business day of such taxable year, and
Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this paragraph at times other than the times provided in this paragraph.
(b)
Exceptions
(1)
In general
Subsection (a) shall not apply to—
(B)
(C)
any security which is a hedge with respect to—
(ii)
a position, right to income, or a liability which is not a security in the hands of the taxpayer.
To the extent provided in regulations, subparagraph (C) shall not apply to any security held by a person in its capacity as a dealer in securities.
(2)
Identification required
A security shall not be treated as described in subparagraph (A), (B), or (C) of paragraph (1), as the case may be, unless such security is clearly identified in the dealer’s records as being described in such subparagraph before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe).
(c)
Definitions
For purposes of this section—
(1)
Dealer in securities defined
The term “dealer in securities” means a taxpayer who—
(2)
Security defined
The term “security” means any—
(B)
partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust;
(E)
evidence of an interest in, or a derivative financial instrument in, any security described in subparagraph (A), (B), (C), or (D), or any currency, including any option, forward contract, short position, and any similar financial instrument in such a security or currency; and
(3)
Hedge
The term “hedge” means any position which manages the dealer’s risk of interest rate or price changes or currency fluctuations, including any position which is reasonably expected to become a hedge within 60 days after the acquisition of the position.
(4)
Special rules for certain receivables
(B)
Nonfinancial customer paper
For purposes of subparagraph (A), the term “nonfinancial customer paper” means any receivable which—
(d)
Special rules
For purposes of this section—
(2)
Improper identification
If a taxpayer—
(A)
identifies any security under subsection (b)(2) as being described in subsection (b)(1) and such security is not so described, or
(B)
fails under subsection (c)(2)(F)(iii) to identify any position which is described in subsection (c)(2)(F) (without regard to clause (iii) thereof) at the time such identification is required,
the provisions of subsection (a) shall apply to such security or position, except that any loss under this section prior to the disposition of the security or position shall be recognized only to the extent of gain previously recognized under this section (and not previously taken into account under this paragraph) with respect to such security or position.
(3)
Character of gain or loss
(A)
In general
(i)
In general
Any gain or loss with respect to a security under subsection (a)(2) shall be treated as ordinary income or loss.
(e)
Election of mark to market for dealers in commodities
(1)
In general
In the case of a dealer in commodities who elects the application of this subsection, this section shall apply to commodities held by such dealer in the same manner as this section applies to securities held by a dealer in securities.
(2)
Commodity
For purposes of this subsection and subsection (f), the term “commodity” means—
(C)
any evidence of an interest in, or a derivative instrument in, any commodity described in subparagraph (A) or (B), including any option, forward contract, futures contract, short position, and any similar instrument in such a commodity; and
(f)
Election of mark to market for traders in securities or commodities
(1)
Traders in securities
(A)
In general
In the case of a person who is engaged in a trade or business as a trader in securities and who elects to have this paragraph apply to such trade or business—
(i)
such person shall recognize gain or loss on any security held in connection with such trade or business at the close of any taxable year as if such security were sold for its fair market value on the last business day of such taxable year, and
Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence. The Secretary may provide by regulations for the application of this subparagraph at times other than the times provided in this subparagraph.
(B)
Exception
Subparagraph (A) shall not apply to any security—
(i)
which is established to the satisfaction of the Secretary as having no connection to the activities of such person as a trader, and
(ii)
which is clearly identified in such person’s records as being described in clause (i) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe).
If a security ceases to be described in clause (i) at any time after it was identified as such under clause (ii), subparagraph (A) shall apply to any changes in value of the security occurring after the cessation.
(C)
Coordination with section
1259
Any security to which subparagraph (A) applies and which was acquired in the normal course of the taxpayer’s activities as a trader in securities shall not be taken into account in applying section
1259 to any position to which subparagraph (A) does not apply.
(D)
Other rules to apply
Rules similar to the rules of subsections (b)(4) and (d) shall apply to securities held by a person in any trade or business with respect to which an election under this paragraph is in effect. Subsection (d)(3) shall not apply under the preceding sentence for purposes of applying sections
1402 and
7704.
(2)
Traders in commodities
In the case of a person who is engaged in a trade or business as a trader in commodities and who elects to have this paragraph apply to such trade or business, paragraph (1) shall apply to commodities held by such trader in connection with such trade or business in the same manner as paragraph (1) applies to securities held by a trader in securities.
(3)
Election
The elections under paragraphs (1) and (2) may be made separately for each trade or business and without the consent of the Secretary. Such an election, once made, shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary.
(g)
Regulatory authority
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including rules—
(1)
to prevent the use of year-end transfers, related parties, or other arrangements to avoid the provisions of this section,