May 21, 2015
close up photograph of stock market chart

Mark-to-Market Election for Hedge Funds

Section 475 of the tax code permits certain active traders to treat all investment transactions as generating ordinary income or loss.  Fund managers making a mark-to-market election recognize all gain or loss in open positions at year-end at the current fair market value as though they had been sold on December 31.  By recognizing all transactions as ordinary income a fund manager forfeits the ability to treat any assets as long-term capital gains.  Similarly, by marking portfolio assets to market at year-end, a manager loses the ability to defer income to later years.