Mark-to-Market Rule: Investment Taxes (2025 IRS Guide)
This guide covers “Mark-to-Market Rule” within investment taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 550 (2025), Investment Income and Expenses, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
If you hold a section 1256 contract at the end of the tax year, you must generally treat it as sold at its fair market value on the last business day of the tax year.
Mark-to-Market Rule
A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the Example under 60/40 rule below.
Hedging exception.
The mark-to-market rule does not apply to hedging transactions. See Hedging Transactions, later.
60/40 rule.
Under the mark-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. This is true regardless of how long you actually held the property.
Example.
On June 3, 2024, you bought a regulated futures contract for $50,000. On December 31, 2024 (the last business day of your tax year), the fair market value of the contract was $57,000. You recognized a $7,000 gain on your 2024 tax return. You treated 60% of the gain as long-term capital gain and 40% as short-term capital gain.
On February 3, 2025, you sold the contract for $56,000. Because you recognized a $7,000 gain on your 2024 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2025 tax return, treated as 60% long-term and 40% short-term capital loss.
Limited partners or entrepreneurs.
The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions). Instead, these gains or losses are treated as short-term.
Terminations and transfers.
The mark-to-market rule also applies if your obligation or rights under section 1256 contracts is terminated or transferred during the tax year. In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts.
Loss carryback election.
An individual having a net section 1256 contracts loss (defined later) can generally elect to carry this loss back 3 years instead of carrying it over to the next year. See How To Report, later, for information about reporting this election on your return.
The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year.
The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts.
If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. For more information, see Capital Losses, later. Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year.
Net section 1256 contracts loss.
This loss is the lesser of:
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The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or
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The capital loss carryover to the next tax year determined without this election.
Net section 1256 contracts gain.
This gain is the lesser of:
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The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or
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The capital gain net income for that year.
Traders in section 1256 contracts.
Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the mark-to-market rule. However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss.
Treatment of underlying property.
The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property.
Deferral of net gain from section 1256 contracts due to investment in Qualified Opportunity Fund.
For special rules relating to the deferral of net gain from section 1256 contracts, see section 1400Z-2. See the Form 8949 instructions for how to report.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 550 (2025), Investment Income and Expenses: Sales and Trades of Investment Property — What Is a Sale or Trade? — Section 1256 Contracts Marked to Market — Mark-to-Market Rule — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.