Planning Around the December 31 Mark

Mark-to-market is the defining feature of § 1256, not a trap, but it inverts most of the year-end habits you developed managing an equity book.

You can owe cash tax in April on a position you have not sold and may never sell at a profit. A deeply underwater short SPX put you are holding into a January recovery still gets marked on December 31, and if that mark prints a gain you write a check. In the other direction you cannot defer a § 1256 gain into next year by refusing to close the position, and there is no point accelerating a § 1256 loss by closing before year end — it would have been marked anyway. Build your year-end tax plan by listing § 1256 contracts separately from the equity book and estimating the December 31 mark as part of this year’s realized P&L. Every planning lever you have on the equity side — deferral, harvesting, holding-period management — is unavailable here, so the only remaining lever is position size before year end.