I have been looking for an answer to this question for some time and hopefully someone more knowledgable can clue me in. I know it is possible to elect MTM status "for securities only" (ie not commodities). Could this loophole work?
I elect MTM in securities only
I earn $100k in "earned income" from my regular (non-trading) employment.
I enter into a SPY / ES hedge trade that yeilds the following :
Loss of $50k in SPY
Gain of $50k in ES
Now, because of my MTM election, my securities trading is considered "ordinary income" and not subject to the $3k max. loss. So the $50k is used against my $100k of employment income saving me $50k * high tax bracket.
The futures gain is of course treated 60/40 Long/Short term, giving me a better tax rate on the $50k futures gain than I would have paid via my employment! Is there something I am missing?
The IRS is already ahead of you. In 1983 there was a landmark tax court case that prohibits losses on one leg of a no-risk hedging transaction.
And since then there were additional hedging limitations that even more specifically address the "loophole" you mentioned.
More details are found by pasting "Hedging Transactions traderstatus" into google.