Mark to market is an accounting method that values an asset at its current market price instead of what you paid for it. In brokerage accounts, it drives the daily profit-and-loss update on your positions. In the tax code, it can force you to recognize gains and losses on assets you still hold, meaning you can owe tax on paper profits sitting in your account on December 31 even though you never sold.
How the Valuation Works
Traditional accounting records an asset at its purchase price and leaves that number alone until you sell. A stock you bought for $50 stays on the books at $50 whether it later trades at $120 or $15. Mark to market replaces that static figure with the current trading price, updating the ledger regularly, usually daily for exchange-traded assets. The value comes from the most recent transaction price between a willing buyer and seller.
How straightforward that is depends on liquidity. A stock trading millions of shares a day on the New York Stock Exchange has an obvious, transparent price. A private equity stake or a thinly traded corporate bond does not. For harder-to-price assets, U.S. accounting standards under ASC 820 set a three-level hierarchy: quoted prices in active markets sit at the top, observable inputs like comparable bond prices or yield curves sit in the middle, and firm-built models with unobservable inputs sit at the bottom. Regulators and auditors watch the bottom tier most closely because those valuations give companies the most discretion.1FASB. Accounting Standards Update No. 2011-04, Fair Value Measurement
Not everything gets repriced. Assets held for trading purposes and derivatives are the usual targets. A buy-and-hold stock portfolio or a piece of real estate generally isn’t marked to market for tax purposes, though a financial institution may still mark it for regulatory reporting.
Daily Settlement in a Trading Account
If you trade on margin, you experience mark to market every day whether you notice it or not. At the close of each session, your brokerage recalculates the value of every open position. Gains get credited to your cash balance; losses get debited immediately. You start the next morning with a fresh snapshot of where you stand.
This matters most when your positions move against you. FINRA Rule 4210 requires that your account maintain equity of at least 25% of the current market value of long stock positions.2FINRA. 4210. Margin Requirements Many brokerages set a house requirement higher, often 30% or 35%. If the day’s mark to market pushes your equity below the maintenance threshold, you get a margin call: deposit more cash or securities, or the brokerage sells positions to cover the shortfall.3FINRA. Margin Regulation The brokerage can liquidate without waiting for your response.
Daily settlement also keeps risk from piling up in the clearinghouses that sit between buyers and sellers. Rather than letting losses accumulate for weeks, the system forces every participant to settle the day’s tab before the next session. A trader who holds a position overnight effectively starts the next morning with a new cost basis equal to the prior day’s closing price.
When Mark to Market Changes Your Tax Bill
Two parts of the tax code apply mark to market treatment to individual traders. Section 1256 applies automatically to a specific list of contracts. Section 475(f) applies only if you elect it and only if you qualify as a trader.
Section 1256 Contracts (Automatic)
Section 1256 doesn’t require an election. If you hold any of the following at year-end, the tax code treats them as sold at fair market value on December 31:4Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market
- Regulated futures contracts
- Foreign currency contracts
- Nonequity options, such as options on stock indexes or commodities
- Dealer equity options
- Dealer securities futures contracts
The gain or loss gets split under the 60/40 rule: 60% is treated as long-term capital gain or loss and 40% as short-term, regardless of how long you actually held the contract.4Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market For a trader in the top bracket, that blends to a maximum effective rate of roughly 26.8%, compared with 37% if everything were short-term.
You report Section 1256 results on Form 6781, Part I. The form nets your gain or loss and splits it into 40% short-term (Schedule D, line 4) and 60% long-term (Schedule D, line 11).5Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
Section 475(f) for Traders (Elected)
Section 475 requires securities dealers to mark their inventory to market each year-end.6Office of the Law Revision Counsel. 26 USC 475 – Mark to Market Accounting Method for Dealers in Securities Section 475(f) lets active individual traders voluntarily opt into similar treatment.7Internal Revenue Service. IRC Section 475, Field Directive Related to Mark-to-Market Valuation
Once you make the election, every security in your trading business is treated as sold at fair market value on December 31. The resulting gains and losses are ordinary, not capital, and you report them on Form 4797, Part II, rather than Schedule D.8Internal Revenue Service. Instructions for Form 4797 (2025) Your cost basis then resets to the year-end value, which prevents you from being taxed twice on the same gain when you eventually do sell.
Qualifying for the Section 475(f) Election
The IRS doesn’t let just anyone elect this. You must qualify as a trader in securities, which requires meeting all three of these conditions:9Internal Revenue Service. Topic No. 429, Traders in Securities
- You seek to profit from daily price movements, not from dividends, interest, or long-term appreciation.
- Your trading activity is substantial.
- You trade with continuity and regularity throughout the year.
The IRS weighs how often you trade, the dollar volume, your typical holding period, the time you devote to trading, and whether it’s a meaningful source of your income. Someone making a few trades a month around a full-time job probably doesn’t qualify. Someone trading daily with short holding periods and devoting most working hours to it likely does. The line is fuzzy, and the IRS has successfully challenged traders who overstated their activity level.
How and When to Make the Election
The deadline is strict. You must attach a written statement to the tax return (or extension request) for the year before the election takes effect. To elect mark to market for the 2026 tax year, the statement must be filed with your 2025 return by its original due date, not including extensions. Miss it and you cannot file a late election; you have to wait a year.9Internal Revenue Service. Topic No. 429, Traders in Securities
The statement should include your name, taxpayer identification number, a clear declaration that you’re electing under Section 475(f), whether the election covers securities, commodities, or both, and the first tax year it applies to. Revoking the election later means filing Form 3115 with the IRS National Office under the non-automatic change procedures, which carries a user fee.10Internal Revenue Service. Instructions for Form 3115
What the Election Gets You, and What It Costs
Three advantages draw traders to the 475(f) election.
The biggest is unlimited loss deductions. Ordinary investors who lose more than they gain in a year can only deduct $3,000 of net capital losses against other income ($1,500 if married filing separately), and the rest carries forward.11Internal Revenue Service. Topic No. 409, Capital Gains and Losses Under the election, trading losses are ordinary losses, and the capital loss limitation doesn’t apply.8Internal Revenue Service. Instructions for Form 4797 (2025) A $50,000 trading loss can offset $50,000 of salary or other ordinary income in the same year.
The second is exemption from the wash sale rules. Normally, selling a security at a loss and buying a substantially identical one within 30 days before or after disallows the loss. For an active trader moving in and out of the same names, wash sale tracking is a nightmare. Section 475(f) traders are exempt.9Internal Revenue Service. Topic No. 429, Traders in Securities
The third: trading gains and losses under the election are not subject to self-employment tax, even though they’re ordinary income. You report the results on Form 4797, and they don’t flow to Schedule SE.9Internal Revenue Service. Topic No. 429, Traders in Securities
The tradeoff is the loss of long-term capital gains rates. All gains become ordinary income, taxed at rates up to 37%, and the favorable 0%, 15%, or 20% long-term rates are off the table. The election makes the most sense for traders whose losses are the bigger problem, or whose holding periods are too short to reach long-term treatment anyway.
The Section 1256 Three-Year Loss Carryback
Section 1256 comes with a benefit many traders overlook. If you end the year with a net loss on Section 1256 contracts, you can carry the loss back to the three preceding tax years and apply it against Section 1256 gains reported in those years. That can generate a refund from a prior year rather than sitting as an indefinite carryforward. You make the election by checking Box D on Form 6781 and filing amended returns for the carryback years.12Internal Revenue Service. Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
The carryback is limited to Section 1256 contract gains in each prior year. It can’t offset stock gains or other income, and it can’t create or increase a net operating loss for the carryback year. The loss applies to the earliest eligible year first. Corporations, estates, and trusts don’t qualify; the carryback is available only to individual taxpayers.12Internal Revenue Service. Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
The Annual Basis Reset
Whether you fall under Section 475 or Section 1256, the year-end deemed sale resets your cost basis to the closing fair market value. If mark to market treated a stock as sold at $85 on December 31, your basis going into January is $85, not whatever you originally paid. Get this wrong and you’ll either pay tax on the same gain twice or underreport income.
For 475(f) traders running hundreds or thousands of positions, tracking adjusted basis through year-end resets is where most errors show up. Trader-focused tax software usually handles the reset automatically. If you’re reconciling by hand, or your brokerage’s year-end statements don’t reflect the deemed sale, the burden falls on you. The IRS expects your Form 4797 figures to match a basis that reflects every prior year’s mark to market adjustment, not the purchase price from three years back.