Tax Analysts provides news, analysis, and commentary on tax accounting, including mark-to-market tax accounting. Mark-to-market accounting, also called fair value accounting, is a way to assess the value of an asset at its current fair market value, rather than only assess the value of the asset on disposition. The alternative, and current standard, is to note the purchase price of an asset as its basis, record any changes in basis during ownership, and recognize gain above that adjusted basis on disposition, or any other realization or recognition event. Mark-to-market accounting does not allow deferral of taxation on those built in gains.
Mark-to-market tax accounting is particularly applicable for publicly traded securities and commodities since the valuation (fair market value) is readily determinable.
Section 475 allows an election for dealers in commodities and traders of securities and commodities to use mark-to-market accounting. A securities dealer must use mark-to-market accounting. Section 475 mark-to-market accounting sets asset valuation at the end of the year, rather than continuously. This is done through a deemed sale for the asset's fair market value. The deemed disposition occurs on the last business day of the taxpayer's tax year. Since the hypothetical sale occurs every year, gain recognized on the assets treated as sold is generally ordinary income.
Even though publicly traded securities and commodities are easy to value, some assets may come under the regime for which there is no public valuation benchmark.
Guidance on mark-to-market tax accounting is found in the documents, news stories, and commentary articles published by Tax Analysts.
Tax Notes Federal and Tax Notes Today Federal subscribers have free access to James M. Peaslee and David Z. Nirenberg, Federal Income Taxation of Securitization Transactions and Related Topics (Fifth Edition). Chapter 11, Part F, describes section 475 (mark-to-market rules for securities dealers), including special challenges in valuing illiquid securities.
