Title 26 — Internal Revenue CodeRelease 119-73
§1296 Election of mark to market for marketable stock
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter P— - Capital Gains and Losses › Part PART VI— - TREATMENT OF CERTAIN PASSIVE FOREIGN INVESTMENT COMPANIES › Subpart Subpart C— - Election of Mark to Market for Marketable Stock › § 1296
Summary
A U.S. person who owns marketable stock in a passive foreign investment company can choose to mark that stock to market for tax. If the stock’s fair market value at year end is higher than its tax basis, the owner must report the extra amount as ordinary income for that year. If the basis is higher than the market value, the owner can take a deduction up to the smaller of that difference or the owner’s prior net inclusions (called “unreversed inclusions”). The owner’s basis is then increased by reported income or decreased by allowed deductions. Gains and losses under this rule are treated as ordinary income or loss, and their source is figured the same way as if the stock were sold. “Unreversed inclusions” means past mark-to-market inclusions minus past deductions. “Marketable stock” means stock regularly traded on a registered national exchange or similar market, and may include certain foreign investment company stock and options as rules allow. Controlled foreign corporations are treated like U.S. persons for this rule, and amounts feed into subpart F rules (treated as foreign personal holding company income under section 954). If the election is made after you already held the stock, special rules under section 1291 may apply unless certain qualified fund rules are met. The election covers the year made and later years until the stock stops being marketable or the IRS allows revocation. If the stock is inherited and the election was in effect at death, the inheritor’s basis is the decedent’s adjusted basis (subject to normal section 1014 limits). If a person becomes a U.S. person after December 31, 1997, the starting basis is the greater of fair market value on that first day or the adjusted basis.
Full Legal Text
Title 26, §1296
Internal Revenue Code — Source: USLM XML via OLRC
(a)In the case of marketable stock in a passive foreign investment company which is owned (or treated under subsection (g) as owned) by a United States person at the close of any taxable year of such person, at the election of such person—
(1)If the fair market value of such stock as of the close of such taxable year exceeds its adjusted basis, such United States person shall include in gross income for such taxable year an amount equal to the amount of such excess.
(2)If the adjusted basis of such stock exceeds the fair market value of such stock as of the close of such taxable year, such United States person shall be allowed a deduction for such taxable year equal to the lesser of—
(A)the amount of such excess, or
(B)the unreversed inclusions with respect to such stock.
(b)(1)The adjusted basis of stock in a passive foreign investment company—
(A)shall be increased by the amount included in the gross income of the United States person under subsection (a)(1) with respect to such stock, and
(B)shall be decreased by the amount allowed as a deduction to the United States person under subsection (a)(2) with respect to such stock.
(2)In the case of stock in a passive foreign investment company which the United States person is treated as owning under subsection (g)—
(A)the adjustments under paragraph (1) shall apply to such stock in the hands of the person actually holding such stock but only for purposes of determining the subsequent treatment under this chapter of the United States person with respect to such stock, and
(B)similar adjustments shall be made to the adjusted basis of the property by reason of which the United States person is treated as owning such stock.
(c)(1)(A)Any amount included in gross income under subsection (a)(1), and any gain on the sale or other disposition of marketable stock in a passive foreign investment company (with respect to which an election under this section is in effect), shall be treated as ordinary income.
(B)Any—
(i)amount allowed as a deduction under subsection (a)(2), and
(ii)loss on the sale or other disposition of marketable stock in a passive foreign investment company (with respect to which an election under this section is in effect) to the extent that the amount of such loss does not exceed the unreversed inclusions with respect to such stock,
(2)The source of any amount included in gross income under subsection (a)(1) (or allowed as a deduction under subsection (a)(2)) shall be determined in the same manner as if such amount were gain or loss (as the case may be) from the sale of stock in the passive foreign investment company.
(d)For purposes of this section, the term “unreversed inclusions” means, with respect to any stock in a passive foreign investment company, the excess (if any) of—
(1)the amount included in gross income of the taxpayer under subsection (a)(1) with respect to such stock for prior taxable years, over
(2)the amount allowed as a deduction under subsection (a)(2) with respect to such stock for prior taxable years.
(e)For purposes of this section—
(1)The term “marketable stock” means—
(A)any stock which is regularly traded on—
(i)a national securities exchange which is registered with the Securities and Exchange Commission or the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or
(ii)any exchange or other market which the Secretary determines has rules adequate to carry out the purposes of this part,
(B)to the extent provided in regulations, stock in any foreign corporation which is comparable to a regulated investment company and which offers for sale or has outstanding any stock of which it is the issuer and which is redeemable at its net asset value, and
(C)to the extent provided in regulations, any option on stock described in subparagraph (A) or (B).
(2)In the case of any regulated investment company which is offering for sale or has outstanding any stock of which it is the issuer and which is redeemable at its net asset value, all stock in a passive foreign investment company which it owns directly or indirectly shall be treated as marketable stock for purposes of this section. Except as provided in regulations, similar treatment as marketable stock shall apply in the case of any other regulated investment company which publishes net asset valuations at least annually.
(f)In the case of a foreign corporation which is a controlled foreign corporation and which owns (or is treated under subsection (g) as owning) stock in a passive foreign investment company—
(1)this section (other than subsection (c)(2)) shall apply to such foreign corporation in the same manner as if such corporation were a United States person, and
(2)for purposes of subpart F of part III of subchapter N—
(A)any amount included in gross income under subsection (a)(1) shall be treated as foreign personal holding company income described in section 954(c)(1)(A), and
(B)any amount allowed as a deduction under subsection (a)(2) shall be treated as a deduction allocable to foreign personal holding company income so described.
(g)Except as provided in regulations—
(1)For purposes of this section, stock owned, directly or indirectly, by or for a foreign partnership or foreign trust or foreign estate shall be considered as being owned proportionately by its partners or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person.
(2)In any case in which a United States person is treated as owning stock in a passive foreign investment company by reason of paragraph (1)—
(A)any disposition by the United States person or by any other person which results in the United States person being treated as no longer owning such stock, and
(B)any disposition by the person owning such stock,
(h)For purposes of section 851(b)(2), any amount included in gross income under subsection (a) shall be treated as a dividend.
(i)In the case of stock of a passive foreign investment company which is acquired by bequest, devise, or inheritance (or by the decedent’s estate) and with respect to which an election under this section was in effect as of the date of the decedent’s death, notwithstanding section 1014, the basis of such stock in the hands of the person so acquiring it shall be the adjusted basis of such stock in the hands of the decedent immediately before his death (or, if lesser, the basis which would have been determined under section 1014 without regard to this subsection).
(j)(1)(A)If the taxpayer elects the application of this section with respect to any marketable stock in a corporation after the beginning of the taxpayer’s holding period in such stock, and if the requirements of subparagraph (B) are not satisfied, section 1291 shall apply to—
(i)any distributions with respect to, or disposition of, such stock in the first taxable year of the taxpayer for which such election is made, and
(ii)any amount which, but for section 1291, would have been included in gross income under subsection (a) with respect to such stock for such taxable year in the same manner as if such amount were gain on the disposition of such stock.
(B)The requirements of this subparagraph are met if, with respect to each of such corporation’s taxable years for which such corporation was a passive foreign investment company and which begin after December 31, 1986, and included any portion of the taxpayer’s holding period in such stock, such corporation was treated as a qualified electing fund under this part with respect to the taxpayer.
(2)(A)If a regulated investment company elects the application of this section with respect to any marketable stock in a corporation after the beginning of the taxpayer’s holding period in such stock, then, with respect to such company’s first taxable year for which such company elects the application of this section with respect to such stock—
(i)section 1291 shall not apply to such stock with respect to any distribution or disposition during, or amount included in gross income under this section for, such first taxable year, but
(ii)such regulated investment company’s tax under this chapter for such first taxable year shall be increased by the aggregate amount of interest which would have been determined under section 1291(c)(3) if section 1291 were applied without regard to this subparagraph.
(B)No deduction shall be allowed to any regulated investment company for the increase in tax under subparagraph (A)(ii).
(k)This section shall apply to marketable stock in a passive foreign investment company which is held by a United States person only if such person elects to apply this section with respect to such stock. Such an election shall apply to the taxable year for which made and all subsequent taxable years unless—
(1)such stock ceases to be marketable stock, or
(2)the Secretary consents to the revocation of such election.
(l)If any individual becomes a United States person in a taxable year beginning after December 31, 1997, solely for purposes of this section, the adjusted basis (before adjustments under subsection (b)) of any marketable stock in a passive foreign investment company owned by such individual on the first day of such taxable year shall be treated as being the greater of its fair market value on such first day or its adjusted basis on such first day.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 11A of the Securities and Exchange Act of 1934, referred to in subsec. (e)(1)(A)(i), is classified to section 78k–1 of Title 15, Commerce and Trade.
Prior Provisions
A prior section 1296 was renumbered section 1297 of this title.
Amendments
2010—Subsec. (i). Pub. L. 111–312 amended subsec. (i) to read as if amendment by Pub. L. 107–16, § 542(e)(5)(C), had never been enacted. See 2001 Amendment note below. 2004—Subsec. (h). Pub. L. 108–311 substituted “section 851(b)(2)” for “paragraphs (2) and (3) of section 851(b)”. 2001—Subsec. (i). Pub. L. 107–16, § 542(e)(5)(C), struck out subsec. (i). Text read as follows: “In the case of stock of a passive foreign investment company which is acquired by bequest, devise, or inheritance (or by the decedent’s estate) and with respect to which an election under this section was in effect as of the date of the decedent’s death, notwithstanding section 1014, the basis of such stock in the hands of the person so acquiring it shall be the adjusted basis of such stock in the hands of the decedent immediately before his death (or, if lesser, the basis which would have been determined under section 1014 without regard to this subsection).” 1998—Subsec. (d). Pub. L. 105–206 inserted at end “In the case of a regulated investment company which elected to mark to market the stock held by such company as of the last day of the taxable year preceding such company’s first taxable year for which such company elects the application of this section, the amount referred to in paragraph (1) shall include amounts included in gross income under such mark to market with respect to such stock for prior taxable years.”
Statutory Notes and Related Subsidiaries
Effective Date
of 2010 AmendmentAmendment by Pub. L. 111–312 applicable to estates of decedents dying, and transfers made after Dec. 31, 2009, except as otherwise provided, see section 301(e) of Pub. L. 111–312, set out as an Effective and Termination Dates of 2010 Amendment note under section 121 of this title.
Effective Date
of 2001 AmendmentAmendment by Pub. L. 107–16 applicable to estates of decedents dying after Dec. 31, 2009, see section 542(f)(1) of Pub. L. 107–16, set out as a note under section 121 of this title.
Effective Date
of 1998 AmendmentAmendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title.
Effective Date
Section applicable to taxable years of United States persons beginning after Dec. 31, 1997, and to taxable years of foreign corporations ending with or within such taxable years of United States persons, see section 1124 of Pub. L. 105–34, set out as an
Effective Date
of 1997 Amendment note under section 532 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1296
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73