Some crypto[1] products are taxed as securities and some are taxed as actively traded commodities. These products are allowed to elect into mark-to-market under current law. Because there is ambiguity with respect to which digital assets are commodities, which are securities, and what is meant by “actively traded,” dealers and traders in digital assets have requested clarity as to when they can use the mark-to-market method of tax accounting with their specific crypto holdings.

Mark-to-market tax accounting is a valuation method for assets and liabilities based on what they could be bought or sold for in today's marketplace rather than at their original purchase price. This approach gives a real-time snapshot of financial worth on a given day.[2] The chosen day for such a snapshot to be taken is the last business day of the taxable year, when the taxpayer’s asset must be treated as if it were sold for its fair market value, and appropriate gains and losses are recognized, regardless of whether the underlying asset is sold.

Multiple sections of the Internal Revenue Code (Code)[3] have allowed or required mark-to-market accounting for decades—and the method is a well-established under both Code Section 475 and Code Section 1256. Let’s take a look at both sections and consider the related overview, along with the (potential) application of the mark-to-market accounting method for digital assets.

Covered Products

Mark-to-market tax accounting is mandatory for securities dealers under Code Section 475.[4] This means that gain or loss on all open security positions[5] held on the last day of the taxable year is recognized as if the security were sold for its fair market value on that day. Code Section 475 is elective for securities traders,[6] commodity dealers,[7] and commodity traders.[8] All gain or loss realized by mark-to-market is treated as ordinary, even for traders that would otherwise receive capital gain or loss.

The term “commodity” is broadly defined in Code Section 475 to include: (1) any commodity that is actively traded for purposes of the straddle rules;[9] (2) any notional principal contract with respect to any commodity; (3) any evidence of an interest in, or derivative instrument in, such a commodity (including any option, forward contract, futures contract, short position, or any similar instrument in a commodity); and (4) any hedge of a position.[10]

Active trading includes activities that range from those conducted through interdealer markets to those that are conducted on regulated financial markets. Commodities include physical commodities, derivative instruments in any commodity, and evidences of interest in any commodity.[11] The definition of a commodity includes any position that is not itself a commodity if it is a hedge with respect to a commodity.

The Internal Revenue Service (IRS) has generally deferred to the Commodity Futures Trading Commission (CFTC) in the past as to what constitutes a commodity under the federal commodity laws.

Are digital assets commodities?

Some digital assets are “actively traded commodities” that are eligible to elect into Code Section 475, but at this time it is not clear which digital assets are “in” and “out” of the commodity definition. Bitcoin (BTC), Ethereum (ETH), Solana (SOL), and XRP are actively traded “commodities” because futures contracts trade on these digital assets. Taxpayers can elect into mark-to-market as commodity dealers or commodity traders for these digital assets. But how can taxpayers determine which other digital assets meet the definition of a commodity at Code Section 475(e)(2)? Many other digital assets are actively traded depending on the definition you use for active trading.

Because actively traded digital assets are commodities for purposes of Code Section 475, the question turns on how “actively traded” is defined for Code Section 475(e)(2)(A). Congress should provide guidance as to how taxpayers can determine which digital assets can be included in Code Section 475, along with determining whether a particular digital asset is actively traded. This will provide parity with respect to the tax treatment of digital assets and other commodities. At present, one consequence of ambiguity is that taxpayers might “shop” their tax professionals based on how one firm or the other defines actively traded digital assets—and this kind of ambiguity should be unacceptable.

If, rather than clarifying how actively traded digital assets are “commodities,” Congress were to amend Code Section 475 to specifically include digital assets, I suggest that Code Section 475 be elective for digital asset dealers as well as traders. There appears to be no reason to make mark-to-market mandatory for digital assets when it is not mandatory for other types of actively traded commodities. Regulated Payment Stablecoins could be exempt from mark-to-market because there is little or no gain or loss on them.[12]

As this series is going to press, Representatives Max Miller and Steven Horsford released a draft House Bill, The Digital Asset Protection, Accountability, Regulation, Innovation, Taxation, and Yields (PARITY) Act (Draft Bill).[13] The Draft Bill would amend the Code, and provide for the tax treatment of digital assets. Released on December 20, it is a “work in progress.” For other discussions of core digital assets taxation topics addressed in the Draft Bill,[14] also see my upcoming analyses in other parts of the Subject Matters Crypto Series on Anti-Abuse, Trading Safe Harbor, and De Minimis.  

As is addressed in the Draft Bill, and as I discuss in greater detail in the Anti-Abuse Rules part of this series, if Congress were to modify the Wash Sales Rule to include digital assets, it should further amend Code Section 475 to permit digital asset dealers and traders to elect into Code Section 475. This would be an important option for taxpayers that want to reduce the burden of tracking and applying the wash sales rule to their digital asset positions.

The Draft Bill would extend the mark-to-market election, on an elective basis, for securities traders, commodity traders, and commodity dealers. In the Draft Bill’s mark-to-market provisions, election into Code 475 would apply to the class of digital assets as defined in the Draft Bill as “specified assets.”

According to the Draft Bill, “specified asset” means any of the following:

“(1) Any security (as defined in section 165(g)(2)).

(2) Except as otherwise provided by the Secretary—

(A) any digital asset (as defined in section 6045(g)(3)(D)) which is actively traded (within the meaning of section 1092(d)(1)),

(B) any notional principal contract with respect to any digital asset described in subparagraph (A), and

(C) any evidence of an interest in, or a derivative instrument in, any digital asset described in subparagraph (A) or (B), including any option, forward contract, futures contract, short position, and any similar instrument in such a digital asset.

Such term shall, except as provided in regulations, include contracts or options to acquire or sell, or notional principal contracts in respect of, any specified assets.”

The Draft Bill defines a digital asset as it is defined in Code Section 6045(g)(3)(D) as: “any digital representation of value that is recorded on a cryptographically secured distributed ledger (or any similar technology) as specified by the Secretary.”

The digital asset definition in the Draft Bill sidesteps the question that currently plagues the commodity definition requiring the commodity to be actively traded. It does not step too far to the side, however, because it proposes a limitation that the Code Section 475 mark-to-market rules will only apply to digital assets that are treated as actively traded (as defined by the Treasury Secretary). As a result, the same issue of what is actively traded remains under the Draft Bill, but it does provide a path with instructions to the Treasury to provide guidance as to the definition of actively traded digital assets.

Code Section 1256

Another mark-to-market section is Code Section 1256. Under Code Section 1256, so-called “section 1256 contracts” that the taxpayer has open on the last business day of the taxable year are marked-to-market with gain or loss brought into income as capital or ordinary, depending on whether the section 1256 contract generates capital gain on ordinary income.

Futures contracts and options on digital assets that trade on U.S. commodity exchanges qualify as section 1256 contracts as defined at Code Section 1256(g) to include regulated futures contracts (RFCs), nonequity options, foreign currency contracts, dealer equity options, and dealer securities futures contracts. Code Section 1256 provides two specific rules for their taxation. The first rule is that section 1256 contracts are marked-to-market on the last business day of the taxable year. The second rule is that section 1256 contracts that are capital assets are taxed as 60 percent long-term and 40 percent short-term capital gain or loss. Ordinary assets are marked-to-market and taxed at ordinary income rates.

At present, BTC, ETH, Solana, and XRP trade regulated futures contracts and nonequity options on CFTC-regulated commodity exchanges: both of these products qualify as section 1256 contracts, so digital asset contracts that qualify as RFCs or non-equity options are subject to section 1256 treatment. As additional digital asset products are traded on commodity and crypto exchanges, there will be more section 1256 contracts that will be subject to the rules at Code Section 1256. In addition, section 1256 contracts will be subject to the mark-to-market rule at Code Section 475 if a commodity dealer or trader elects into Code Section 475 for tax accounting purposes.

The future of mark-to-market for digital assets

Today, the Code requires securities dealers to pay federal income tax on a mark-to-market basis. In other words, if a particular security that they hold is worth more at year-end than it had been at the beginning of the year, the dealer must report the aggregate gain as taxable income because the dealer must be in Code Section 475 for dealer securities. Securities and commodities traders, on the other hand, can elect into mark-to-market. The reasons for this are simple. If your securities holdings are more like inventory than they are like investments, and if you engage in a lot of trading, then paying tax on net gain every year is much simpler to compute. In addition, the government believes mark-to-market better reflects economic reality than reporting profit and loss on every single trade.

At present, the Code does not explicitly authorize mark-to-market taxation for digital assets dealers or traders. Digital assets get into mark-to-market if the item is viewed as a security or an actively traded commodity.

Mark-to-market tax accounting will be welcomed by many digital asset dealers and traders, provided that it is elective, as opposed to mandatory, for commodity dealers and traders.

[1] “Crypto” has become a generic term that is interchangeable with “Digital Assets” in popular vernacular. “Cryptocurrencies” are one category among many classes of digital assets. Digital assets include cryptocurrencies like Bitcoin, stablecoins, security tokens, utility tokens, non-fungible tokens, real world asset tokens and crypto derivatives / digital asset-based derivatives.

[2] For a quick overview of mark-to-market accounting, see Mark to Market (MTM): What It Means in Accounting, Finance & Investing, Tobi Opeyemi Amure, Investopedia (last updated Feb. 27, 2025), available at https://www.investopedia.com/terms/m/marktomarket.asp#:~:text=Mark%20to%20market%20(MTM)%20is%20a%20method%20of%EE%80%80%20measuring.

[3] Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended (the “Code”) or the applicable regulations promulgated pursuant to the Code (the “Regulations”).

[4] Defined at Code § 475(c)(1).

[5] Defined at Code § 475(c)(2).

[6] Code § 475(f)(1).

[7] Code § 475(e).

[8] Code § 475(f)(2).

[9] Actively traded is a concept in Code Section 1092(d)(1). Because most actively-traded digital assets are “commodities,” it is important to look at the definition of a commodity in Code § 475.

[10] Code § 475(e)(2).

[11] Interestingly, the Code § 475 statutorily enumerated definitions of a “security,” specifically excludes Code § 1256 contracts, but the term “commodity” specifically includes Code § 1256 contracts. This makes section 1256 contracts in commodities subject to Code § 475, rather than Code § 1256. For a discussion of section 1256 contracts, see discussion below.

[12] Code § 6045.

[13] The Digital Asset Protection, Accountability, Regulation, Innovation, Taxation, and Yields (PARITY) Act, House of Representatives Bill Discussion Draft (Dec. 20, 2025) available at https://horsford.house.gov/sites/evo-subsites/horsford.house.gov/files/evo-media-document/miller-horsford_digital-asset-tax-bill-discussion-draft.pdf.

[14] Ibid.