Mark-to-Market (MTM)

What Is Mark-to-Market (MTM)?

Mark-to-market is a way to measure a company or individual’s assets based on current market conditions. This provides a more accurate representation of assets and liabilities but comes with administrative challenges. Taxing on a mark-to-market basis would impose taxes annually on the change in an asset’s value year-over-year and is an alternative to taxing capital gains, which are currently taxed only when an asset is sold.

Why Is Mark-to-Market Used?

Mark-to-market (MTM) is used to calculate the current or real value of a company or individual’s assets. The main objective is to provide a reliable and accurate picture of financial status and show annual fluctuations in wealth due to capital gains and losses year-over-year.

The Downsides to Mark-to-Market (MTM)

A mark-to-market system can result in new complexities and compliance costs for taxpayers and levy taxes on unrealized (“paper”) income, ultimately reducing saving and investment to the detriment of the broader economy.

Additionally, taxing unrealized income creates liquidity problems: if a taxpayer’s assets appreciate, but they do not hold much cash, they may have to sell off stock just to pay capital gains taxes. This could in turn create problems for businesses as well. 

Mark-to-market (MTM) often does not give an accurate picture of an asset’s value during market volatility, like a financial crisis. Additionally, not every asset will have a fair market value that is easy to determine, either because it is not openly traded or is difficult to quantify. Examples of these difficult-to-value assets include a company’s intellectual property, reputation, or “brand value.” This complicates the calculations and will require suboptimal substitute options such as an asset’s book value (the original cost of the asset minus the depreciation).

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