What Is the Difference between Mark-to-Market and Realization-Based Accounting?

Realization-based accounting only recognizes a gain or loss when a position is closed or sold (realized). Mark-to-market accounting recognizes gains or losses on open positions at the end of the tax year as if they were sold at their fair market value, even if the position remains open (unrealized).

Section 1256 contracts use mark-to-market; most other capital assets use realization-based accounting.