Mark to Market

Mark to market is an accounting method where open (unsettled) positions are valued at their current market price on the last day of the tax year. Any unrealized gain or loss is treated as if the position was closed and immediately reopened.

Section 1256 requirement

If you use Section 1256 treatment for your prediction market trades, you must mark open positions to market on December 31. This means you may owe taxes on gains from positions that haven't actually settled yet.

Example

You buy 200 YES shares at $0.40 in November. On December 31, they're trading at $0.75 but the market hasn't resolved. Under mark to market:

• Unrealized gain: 200 × ($0.75 − $0.40) = $70
• This $70 is reported on Form 6781 as a 2024 gain
• In 2025, your cost basis resets to $0.75 per share

Other methods don't require mark to market

Under capital gains, ordinary income, or gambling income treatment, you only report gains/losses when positions actually close. Open positions on December 31 are not taxable events.

Practical challenge

Determining the "fair market value" of a prediction market contract on December 31 can be difficult, especially for illiquid markets or markets on platforms that don't display real-time prices. This is one reason Section 1256 is considered more complex to apply.