What rule treats each Section 1256 contract as if it were sold for fair market value at year-end?

The marked to market rule is a tax regulation that treats each Section 1256 contract as if it has been sold for fair market value at the end of the tax year. This means that the gains or losses on these contracts are recognized for tax purposes even if the contracts have not been sold. This rule applies specifically to certain types of financial instruments, including futures contracts, options on futures, and certain foreign currency contracts, allowing taxpayers to report their income or loss annually based on the year-end value of those contracts.

By using the marked to market accounting method, taxpayers can avoid being taxed multiple times on gains that have not been realized through actual sales. Instead, they recognize all gains and losses in a single tax year. This rule simplifies accounting for these types of instruments and aligns tax reporting with current market values, ultimately providing a clearer picture of a taxpayer’s financial position at the end of the year.