Marking an asset to market means that you’re treating it as if you’ve sold it for fair market value at the end of the year, accounting for the gain or loss incurred.
“It won’t help the wealthy to hold the asset for a longer time; that ability to defer the tax would be taken away,” said Steve Wamhoff, director for federal tax policy at the Institute on Taxation and Economic Policy.
Figuring out the appreciation of a stock or a mutual fund isn’t all that hard to do, but calculating gains on real estate investments, partnership interests and other closely held businesses could present a problem.
“This requires some method to price goods that are in illiquid markets,” said Kyle Pomerleau, chief economist at the Tax Foundation. “Ownership of a business isn’t traded in the open market, but it has a value.”
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Investors could have some wiggle room here. “It could well lead to gaming by taxpayers who use lowball numbers for valuation,” said Rosenthal.
How Wyden’s proposal will tackle this issue remains to be seen.
However, one potential way around this is to allow the owner of the illiquid asset to defer the mark-to-market tax until he or she sells the holding, Wamhoff said.
“The taxes that are paid upon sale are increased so that you’re in the same position as if it had been taxed each year under mark-to-market,” he said.