Capital losses in 2016 can carryover to 2017 and offset capital gains in 2017, not day trading gains. You can't use MTM to treat day trading losses as ordinary losses but day trading gains as capital gains that offset capital losses. You need to be consistent - they are one or the other. They can't be both merely because it is tax advantageous to be both.
You are correct - once M2M election is made, gains and losses IN 2016 FORWARD will be converted to ordinary income and losses. As a result, carryover capital losses from prior years cannot be offset against those gains. They can be offset against any gains on securities you designate as investment securities WHEN YOU BUY THEM. As the IRS notes "A trader must keep detailed records to distinguish the securities held for investment from the securities in the trading business. The securities held for investment must be identified as such in the trader's records on the day he or she acquires them (for example, by holding them in a separate brokerage account).
Remember that in addition to the election you also have to file Form 3115. If you haven't read this IRS article, you should: <a rel="nofollow" target="_blank" href="
https://www.irs.gov/taxtopics/tc429.html">https://www.irs.gov/taxtopics/tc429.html</a>
