Taxing Investors on a Mark-to-Market Basis

45 Pages Posted: 26 Jun 2009 Last revised: 27 Jan 2012

See all articles by Samuel D. Brunson

Samuel D. Brunson

Loyola University Chicago School of Law

Date Written: June 26, 2009


Recognizing that mark-to-market accounting, with its close approximation of Haig-Simons income, represents a better measure of a taxpayer’s income than realization accounting - the historical basis for the federal income tax - Congress enacted section 475(f) of the Internal Revenue Code. This section permits certain taxpayers to elect out of the realization accounting regime and instead mark their investments to market. Congress limited the availability of this election to taxpayers who were engaged in the trade or business of trading securities. Although the election must be made early in a taxpayer’s taxable year, the test for determining whether a taxpayer is engaged in the trade or business of trading securities during a taxable year can only be performed after the year ends. As the rules for making a mark-to-market election are currently written, in order to determine whether she qualifies to make the election, a taxpayer must know no later than April 15 what the extent of her trading activities will be for the rest of the year, as well as for all future years. There is no compelling tax policy reason to limit the availability of the mark-to-market election. Rather, the superiority of mark-to-market accounting over the current realization regime supports a policy of allowing (and encouraging) taxpayers to determine their tax liability on a mark-to-market basis and outweighs any objections to liberalizing the election’s availability. Alternatively, in the event that Congress decides that denying non-traders the ability to elect mark-to-market treatment is justified, Congress or the Treasury Department should adopt a proposed safe-harbor provision that approximates the criteria courts consider when determining whether a taxpayer is a trader, but that, unlike the current trade-or-business test, can be applied in advance of the taxable year. Although providing a safe harbor solely to traders is, from a policy perspective, worse than making the mark-to-market election available to all taxpayers, it is nonetheless better than the current unworkable criteria because it provides certainty to taxpayers at the time they must make the election.

Keywords: tax law, mark-to-market, elections, 475(f), Haig-Simons, realization

Suggested Citation

Brunson, Samuel D., Taxing Investors on a Mark-to-Market Basis (June 26, 2009). Loyola of Los Angeles Law Review, Vol. 43, No. 2, 2010, Available at SSRN:

Samuel D. Brunson (Contact Author)

Loyola University Chicago School of Law ( email )

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Chicago, IL 60611
United States