New Mark to Market Rule for “Securities Dealers”

by Stephen Kass on October 10, 2012

The Revenue Reconciliation Tax Act of 1993 (“the Act”) enacted on August 10, 1993 includes a new provision (Internal Revenue Code Section 475) requiring mark to market tax accounting for all dealers in securities. This provision is effective for tax years ending on or after December 31, 1993.

The new provision will require that inventories of securities, which are not investments, be valued at fair market value. If the security is not inventory, the dealer must recognize gain/loss as if the security was sold for its fair market value on the last business day of the taxable year. A hedge may or may not fall under these rules depending on the hedging instrument and the type of transaction. For subsequent dispositions, taxpayers must adjust the basis in securities to reflect the gain or loss previously recognized under the mark to market rules. Certain statutory exceptions are available for non-inventory dealer securities.

Taxpayers Affected by Section 475
The mark to market rules apply to “securities” held by a “dealer”:
(1) Dealer- a dealer in securities is any taxpayer who:

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