Tax Blog

IRS Denies Extension Request for Late Mark-to-Market Election (PLR-120645-22)

Accounting methods are paramount when calculating income and expenses for taxation purposes. One such method is the Mark-to-Market (MTM) method, as explained in §475(f)(1) of the Internal Revenue Code (IRC). In this blog post, we explore a comprehensive case study (PLR-120645-22) to understand the impact and importance of MTM elections in investment and trading activities.

What MTM Means in Finance

Before we delve into the case, let’s define MTM. MTM is an accounting method that values assets and liabilities at their current market value. This method offers a realistic appraisal of a financial situation, as it takes into account fluctuations in the market value of assets and liabilities.

Application of MTM: An Example in Trading Gains and Losses

The MTM method is extensively used in futures and derivatives trading, wherein traders realize gains and losses daily. Every trading day, positions are marked-to-market and gains or losses are calculated using the closing market prices of the day. This daily adjustment ensures a more accurate representation of a trader’s equity in a highly volatile trading environment.

For traders, electing MTM accounting under §475(f)(1) of the IRC means that they treat their securities as if they were sold for their fair market value on the last business day of the year. This election allows them to recognize gains and losses that are both realized and unrealized at the year-end.

The Significance of MTM in Banks and Other Financial Institutions

Banks and financial institutions also apply MTM accounting, which helps to assess their assets and liabilities accurately. These institutions deal with various types of financial instruments – from securities and loans (assets) to deposits and borrowings (liabilities). By marking these to the market, they reflect a more accurate and current financial health snapshot.

The Case Study: Unpacking PLR-120645-22

Now, let’s turn to our case study, a Private Letter Ruling (PLR-120645-22) issued by the IRS. The case revolves around a taxpayer who incurred significant capital losses and faced the unexpected application of the wash sale rule due to a lack of awareness about the MTM election.

Uncovering the Loss from Trading

During Year 2, the taxpayer realized significant capital losses primarily after the deadline for the MTM election. Moreover, the application of the wash sale rules disallowed their capital losses and could not offset their capital gains for Year 2, resulting in a substantial reported capital gain.

Understanding the Election: What MTM Means for the Taxpayer

Upon receipt of a Form 1099 detailing capital gains and disallowed losses, the taxpayer, with the help of their Tax Advisor, discovered the possibility of the MTM election. However, by this point, the deadline for the MTM election for Year 2 had already passed.

Learning from the Past: The Taxpayer’s Adjustment to the Rules

Recognizing the advantages of the MTM election, the taxpayer made a timely §475(f)(1) election for Year 3. However, the taxpayer did not file a request for an extension of time under §301.9100-3 to make a late §475(f)(1) election effective for Year 2 until later.

The Process for Change: Filing Form 3115

To change the accounting method and apply for MTM, one must submit Form 3115 to the IRS. While this change may invite the IRS to scrutinize the taxpayer’s previous tax returns, it can provide substantial benefits, especially if a taxpayer incurred substantial losses.

The Aftermath: The MTM Method and Its Implications

The Taxpayer’s situation elucidates the potential pitfalls of securities trading without comprehensive knowledge of tax implications and the benefits of timely and knowledgeable tax advice. This case also underscores the importance of electing the MTM method when it is advantageous for the taxpayer.

Conclusion: Unpacking the Importance of MTM in Accounting

This case study offers an invaluable lesson about the role of MTM in accounting and tax implications. It serves as a potent reminder that taxpayers and tax advisors must thoroughly understand tax election choices, particularly MTM, to maximize the financial benefits and minimize tax liabilities.

If you have questions about this or any other tax mater, call The Tax Defenders today at 312-345-5440. We’ve helped thousands of taxpayers with tax debts resolve them through audit representation, unfiled tax returns, payment plan issues, and tax settlements.

How is mark-to-market calculated?

Mark-to-market (MTM) calculation is a simple process that involves adjusting the value of an asset, liability, or equity position to its current market value.

Here is a step-by-step guide to calculate MTM:

Step 1: Identify the Asset or Liability

The first step in MTM calculation is identifying the asset, liability, or equity position for which you want to calculate the MTM value.

Step 2: Find the Current Market Price

Once you’ve identified the asset or liability, you must find its current market price. This price is the value that the asset or liability would fetch if it was sold in the market at present. You can usually find this price from financial news websites, stock exchanges, or financial market data services.

Step 3: Calculate the MTM Value

To calculate the MTM value, you subtract the original cost of the asset or liability from its current market price.

Let’s consider an example:

Suppose you bought 100 shares of Company A at $50 per share. So, the original cost of your investment is $5,000 (100 shares x $50/share).

A year later, the market price of Company A’s shares has increased to $60 per share. So, the current market value of your investment is $6,000 (100 shares x $60/share).

Using the MTM election method, the value of your investment in Company A is now $6,000, not the original $5,000 you paid for the shares. Therefore, the MTM value represents an unrealized gain of $1,000.

In the case of a liability or debt, the MTM value would represent the amount you would have to pay if you were to settle the liability or debt at the current market price.

Note on derivatives and futures:

For some financial instruments, such as derivatives and futures contracts, the MTM calculation may be more complex and might take into account various factors such as time value, interest rates, and expected volatility. In such cases, financial models and software are often used to calculate the MTM value.

Is mark-to-market still used today?

Yes, the Mark-to-Market (MTM) accounting method is still in use today and is widely applied in the financial industry. It’s an essential tool in the world of trading and investing, particularly within the realms of futures trading, mutual funds, and trading of securities. Financial institutions and investment firms use MTM to provide a realistic appraisal of a financial situation, as it allows them to value assets and liabilities based on current market prices.

For example, mutual fund companies use MTM to calculate the net asset value (NAV) of their funds at the end of each trading day. The NAV is calculated by marking all assets in the portfolio to their market value.

Also, futures contracts are marked-to-market at the end of each trading day, which means that daily gains or losses are calculated and added or subtracted from the traders’ accounts.

Furthermore, financial institutions like banks use MTM for their trading and available-for-sale portfolios to ensure they are presenting a fair view of their financial condition to investors, creditors, and regulatory bodies.

Lastly, on the taxation side, the IRS allows traders and investors to use Mark-to-Market elections for their securities and commodities under section 475(f) of the Internal Revenue Code. This election allows them to recognize gains and losses that are both realized and unrealized at the year-end, potentially providing significant tax advantages.

What is mark-to-market with an example?

Mark-to-market (MTM) is a method of valuing assets and liabilities based on their current market prices. This method allows for the most realistic and up-to-date valuation possible, reflecting the true value of an asset or liability as it would be if it were sold or settled in the current market.

Let’s use an example to better understand how mark-to-market works:


Suppose an investor purchases 100 shares of XYZ Corp. for $20 per share. The initial cost of the investment is $2,000 (100 shares x $20).

A few months later, the price of XYZ Corp shares rises to $25 per share. Even though the investor has not sold the shares, using the mark-to-market method, the value of the investment is updated to reflect the current market price. Therefore, the value of the investment in the financial statement will now show $2,500 (100 shares x $25).

The investor now has an unrealized gain of $500 ($2,500 – $2,000) due to the increase in the share price. This unrealized gain is reported in the financial statement, demonstrating how the value of the asset has changed due to market fluctuations.

If the price of XYZ Corp shares fell to $15 per share, then the mark-to-market value of the investment would be $1,500 (100 shares x $15), resulting in an unrealized loss of $500 ($1,500 – $2,000).

This mark-to-market process is done periodically, usually daily for financial institutions, to ensure that the values of assets and liabilities accurately reflect their current market values.

The example illustrates how the mark-to- market election method allows for the ongoing revaluation of assets or liabilities, ensuring that their recorded value aligns with current market conditions. This is crucial for both companies and investors to understand the current financial situation accurately.

What is the difference between mark-to-market and P&L?

Mark-to-market (MTM) and Profit & Loss (P&L) are both important financial concepts, but they serve different purposes and provide different types of information.

Mark-to-Market (MTM)

Mark-to-market is an accounting method that involves valuing assets and liabilities based on their current market prices. It reflects the current market value of an asset or liability, providing a realistic appraisal of a company’s or investor’s financial situation.

For example, in the case of a trading portfolio, MTM involves re-evaluating the value of securities at the end of each trading day based on the closing market prices. The unrealized gains or losses due to the fluctuation in market prices are reflected in the balance sheet.

Profit & Loss (P&L)

A Profit & Loss statement, also known as an income statement, is a financial document that summarizes the revenues, costs, and expenses incurred during a specific period of time. The P&L statement provides information about a company’s ability to generate profit by increasing revenue, reducing costs, or both.

The key difference between the two lies in what they represent:

  • MTM provides a snapshot of the potential gains or losses that a company or investor would realize if their assets or liabilities were sold or settled at their current market prices. It involves unrealized gains and losses, and reflects changes in the market value of assets and liabilities.
  • P&L, on the other hand, tracks realized revenues and expenses over a specific period, showing whether a company made a profit or a loss during that time. It includes all the company’s operating and non-operating activities.

In summary, while MTM provides a real-time view of assets and liabilities value, a P&L statement provides a historical record of a company’s operational performance over a specific period.