What Is Mark to Market (MTM)? Meaning in Accounting and Investing
By Markets & Investing DeskUpdated Nov 10, 2026
Definition
Mark to market values an asset or liability at its current market price instead of its original cost, recording the change from the last mark as a gain or loss even if nothing is sold.
Key takeaways
- MTM gain or loss equals the current market price minus the previous mark, multiplied by the quantity held.
- Futures exchanges mark positions daily, so losses are debited from margin accounts and can trigger margin calls.
- Level 3 assets rely on internal models and assumptions, a practice often called mark to model.
- Section 1256 contracts are taxed as if sold at fair value at year end, split 60% long-term and 40% short-term.
Mark to market (MTM) is a method of valuing an asset or liability at its current market price instead of the price originally paid for it. Each time a position is “marked,” its recorded value is reset to what it could be sold for (or what it would cost to transfer a liability) at that moment, and the difference from the previous mark is recorded as a gain or loss, even if nothing has been sold. In accounting, the approach is called fair value accounting. In trading, marking to market is the daily process that settles gains and losses on futures and other margined positions.
What Mark to Market Means
The term originated in futures markets, where exchanges and brokers settled gains and losses every day so that no trader could accumulate large unpaid losses. Standard setters later adopted the same idea as fair value measurement for many financial instruments.
MTM is the opposite of historical cost accounting, under which an asset stays on the books at its purchase price (less depreciation or impairment where applicable). Historical cost is stable and easy to verify but can drift far from economic reality; MTM tracks reality more closely, at the cost of more volatile reported numbers.
How Mark to Market Works
The calculation is the same whether a futures exchange marks daily or a company marks quarterly in its financial statements:
MTM gain or loss = (Current market price − Previous mark) × Quantity held
A positive result is a mark-to-market gain; a negative result is a mark-to-market loss. The current price then becomes the new reference point for the next mark.
Two terms help when reading MTM figures:
- Unrealized gain or loss: the change in value of a position that is still open. MTM figures are usually unrealized.
- Realized gain or loss: the result once the position is sold or closed. In daily-settled futures, however, the mark is paid or received in cash each day, so the gain or loss is settled as it occurs.
A mark-to-market adjustment is the accounting entry that moves a carrying value to the new fair value. Where that adjustment lands depends on the instrument and its classification. Under US GAAP, for example, unrealized changes on debt securities classified as “trading” flow through net income on the income statement, while those classified as “available for sale” go to other comprehensive income, a separate equity account on the balance sheet, until the securities are sold.
The Fair Value Hierarchy
The US framework took shape with FASB Statement No. 157, now codified as ASC 820. It defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, and it sets out three levels of inputs:
- Level 1: quoted prices in active markets for identical assets. Shares of a large exchange-listed company are the standard example: the closing price is the mark.
- Level 2: no direct quote, but the value can be derived from observable data such as prices of similar instruments. A corporate bond that rarely trades can be priced by reference to comparable bonds with recent trades.
- Level 3: unobservable inputs, meaning the company relies on its own models and assumptions. Private equity stakes, complex derivatives and distressed debt in frozen markets often fall here, and auditors and regulators scrutinize these marks most closely. Valuing this way is often called mark to model.
Example of Mark to Market
Futures Margin (Hypothetical)
A trader buys one futures contract covering 1,000 units at $50.00 per unit and posts initial margin with a broker. The exchange marks the position at each day’s settlement price:
| Day | Settlement price | Change per unit | Daily MTM (× 1,000) | Cumulative |
|---|---|---|---|---|
| Day 1 | $48.50 | −$1.50 | −$1,500 | −$1,500 |
| Day 2 | $49.20 | +$0.70 | +$700 | −$800 |
| Day 3 | $51.00 | +$1.80 | +$1,800 | +$1,000 |
Assumptions: one long contract, no fees, opened at $50.00. On Day 1, $1,500 is debited from the margin account; if the balance falls below the broker’s maintenance margin level, the trader receives a margin call and must deposit more funds. On Day 3, the $1,800 gain is credited. The seller of the contract experiences the mirror image of each move. Collecting losses daily, before they can grow, limits counterparty risk.
A Bank’s Bond Portfolio (Hypothetical)
A bank buys $100 million of long-dated government bonds when interest rates are low. Rates then rise sharply, comparable bonds trade at a discount, and the portfolio’s market value falls to $85 million. Under MTM, the bank records a $15 million decline even though the bonds will still repay $100 million at maturity, assuming no default. If the bank is forced to sell before maturity, that loss becomes realized.
Where Mark to Market Is Used
Mutual funds. A fund’s net asset value (NAV) is calculated each trading day by marking every holding to its closing price. Investors buying or redeeming shares transact at that NAV.
Hedge funds, private equity and venture capital. These portfolios often hold more Level 3 assets. A venture fund may mark a startup at the price of its latest funding round, then revisit the value between rounds using comparable public companies, recent private deals or the company’s results.
Corporate hedging. Companies that hedge with derivatives mark those positions regularly. An airline holding fuel swaps, for example, books MTM losses on the hedges when oil prices fall, even though cheaper fuel helps its operations. During the 2020 pandemic oil collapse, airlines faced exactly this mismatch between hedge losses and lower operating costs.
Foreign exchange. Forward FX contracts and foreign-currency positions are commonly revalued at current exchange rates, producing MTM gains or losses as rates move.
Individual investors. A brokerage account balance is a mark-to-market figure: it shows what holdings are worth at current prices, not what was paid.
Real estate. The phrase is used informally for revaluing a property to current market value, such as when a lender reappraises collateral. Under US GAAP, most operating companies carry real estate at historical cost less depreciation, so this use is closer to an appraisal than a formal MTM accounting entry.
Taxes. US tax law applies MTM in specific cases. Regulated futures and certain other contracts covered by Section 1256 of the Internal Revenue Code are treated as sold at fair value on the last business day of the year, with gains and losses taxed 60% long-term and 40% short-term. Separately, traders who qualify as being in the business of trading can elect mark-to-market treatment under Section 475(f), which treats gains and losses as ordinary rather than capital.
Limitations of Mark to Market
Procyclicality. MTM ties reported strength directly to market prices. When prices fall, asset values and equity capital shrink together, which can force selling that pushes prices lower still. In a bubble, the reverse happens: inflated marks can make balance sheets look stronger than they are.
Illiquid markets. When trading dries up, the “market price” may reflect forced sales rather than long-term value. During the 2008 financial crisis, banks argued that marks on mortgage-related securities overstated losses because the markets for them had frozen. In April 2009, FASB issued additional guidance on estimating fair value when a market is not active.
Model risk. For Level 3 assets, the mark is only as good as the model and its assumptions, which creates room for error and for optimistic valuations.
The 2023 bank failures. Silicon Valley Bank had invested heavily in long-dated government bonds when rates were low, and their market value fell as rates climbed. When depositors withdrew funds, the bank sold securities and recognized large losses, an episode that preceded its collapse. Securities designated held to maturity are carried at amortized cost rather than market value, but only if the institution has the intent and ability to hold them until maturity, and unrealized losses on them are not reflected in reported equity until a sale occurs.
Mark to Market vs. Related Terms
| Term | How it differs from MTM |
|---|---|
| Historical cost | Keeps the original purchase price; ignores later market moves. |
| Amortized cost | Starts at cost and adjusts gradually toward face value over time; used for held-to-maturity debt. |
| Mark to model | A form of fair value used when no market price exists; based on internal models. |
| Impairment | A write-down when an asset’s value falls below its carrying amount; it does not revalue upward the way MTM does. |
| Net realizable value | Estimated selling price less costs to complete and sell; used mainly for inventory. |
MTM P&L is also not the same as month-to-month P&L. The abbreviation “MTM” in trading reports refers to mark-to-market profit and loss, which can be calculated daily, monthly or at any fiscal quarter end, depending on the reporting period.
FAQs
Is a mark-to-market gain a capital gain?
Not necessarily. For a regular investor's stock holdings, an MTM gain is unrealized and generally is not taxed until the shares are sold, when it becomes a capital gain or loss. Section 1256 contracts and traders with a Section 475(f) election are the exceptions described above.
What does a mark-to-market gain or loss on convertible debentures mean?
It means the company carries the convertible instrument, or a derivative embedded in it, at fair value and reported the period's change in that value in earnings. Because a conversion feature's value depends on the issuer's share price, a rising stock price can increase the liability's fair value and produce a reported loss even though no cash moved.
The Bottom Line
Mark to market matters to traders, fund investors, banks and companies that hedge, because it shows what positions are worth now rather than what was paid. It tracks economic reality more closely than historical cost, but reported numbers swing with prices. Readers should pay close attention to illiquid markets and model-based Level 3 marks, where the recorded value can stray furthest from what a sale would bring.
