Mark-to-Market Tax: How the US Exit Tax Actually Calculates Your Gain

Mark-to-market taxation means taxing gains based on current fair market value rather than waiting for an actual sale. In most contexts, it's a concept in accounting and derivatives trading. In the context of the US exit tax, it's the core mechanism that determines what a covered expatriate owes when they renounce citizenship or abandon long-term permanent residency.

The US exit tax is, at its core, an unrealized gains tax — imposed not when you sell your assets, but when you leave. Understanding how the mark-to-market calculation works helps clarify what's actually at stake and where planning opportunities exist.

The Deemed Sale Mechanism

Section 877A of the Internal Revenue Code imposes a "mark-to-market" regime on covered expatriates. On the day before expatriation, the IRS treats every asset you own worldwide as if you sold it at fair market value. This is the "deemed sale" — it's not an actual transaction, but it creates a taxable event.

The calculation is: fair market value on the day before expatriation, minus your adjusted basis in the asset, equals the recognized gain or loss. Net gains above the annual exclusion amount are taxed.

For 2026, the exclusion amount is $910,000 — meaning you can have up to $910,000 in net gain across all deemed-sold assets before owing any exit tax. Above that threshold, gains are taxed at long-term or short-term capital gains rates depending on how long you've held each asset.

What's Included in the Deemed Sale

The scope of the deemed sale is intentionally broad:

Included:

• Stocks and securities (US and foreign)
• Mutual funds, ETFs, index funds
• Interests in partnerships and LLCs
• Foreign real estate
• Business interests (sole proprietorships, S-corp shares, etc.)
• Options, warrants, and other financial instruments
• Personal property of significant value
• Foreign accounts and assets of every kind

Explicitly excluded from the deemed-sale rule:

• US real property interests (these are handled separately under FIRPTA and continue to be taxed when actually sold)
• "Eligible deferred compensation" from certain plans (handled differently, discussed below)
• Non-eligible deferred compensation (IRAs, 401(k)s, etc.) — also handled differently, but not via deemed sale

The mark-to-market calculation applies to everything in the "included" category simultaneously. If you have gains in some assets and losses in others, they net against each other before the $910,000 exclusion is applied.

Retirement Accounts: The Worst Treatment

IRAs, 401(k)s, 403(b)s, SEP-IRAs, and similar pre-tax accounts don't go through the deemed-sale calculation. Instead, under Section 877A(e)(1), the entire balance is treated as distributed on the day before expatriation and taxed as ordinary income.

This is harsher than the deemed-sale treatment in two ways:

1. It's taxed at ordinary income rates — up to 37% federal — not at the preferential capital gains rates that apply to the deemed sale.
2. The $910,000 exclusion doesn't apply. A $600,000 IRA balance becomes $600,000 of income in full.

The early withdrawal penalty (normally 10%) does not apply to the Section 877A distribution — the IRS waives it. But that's cold comfort given the income tax exposure.

Roth IRAs are treated the same way — the balance is deemed distributed — but since Roth contributions were already taxed, only the earnings portion is taxable. For someone with a substantial Roth, this is more manageable than a traditional IRA.

The implication for planning: converting traditional IRA balances to Roth before expatriation, while still a US resident and paying income tax on the conversion, can be preferable to leaving a large traditional IRA that gets fully taxed at ordinary rates under 877A. This is worth modeling carefully with a tax professional.

"Eligible" Deferred Compensation

Some deferred compensation plans — typically employer-sponsored arrangements where a non-US employer is the payer — qualify as "eligible deferred compensation" and are treated under a different rule: the payer withholds 30% of each distribution paid to the former US person after expatriation, and sends it to the IRS.

There's a one-time election to have eligible deferred compensation treated as deemed distributed (marked to market) at expatriation, which can be preferable if you expect to be in a lower tax bracket than 30%.

Most 401(k)s and pension plans with US employers are non-eligible deferred compensation and fall into the full-distribution rule, not this 30% withholding alternative.

The Basis Question: What's Your Adjusted Basis?

The mark-to-market gain is market value minus adjusted basis. For most assets, adjusted basis is what you paid for them, plus any improvements (for real property). For inherited assets, basis is typically the fair market value at the date of the prior owner's death.

Getting basis right is critical for exit tax planning. Someone who acquired appreciated stock decades ago at a low cost basis faces a much larger deemed-sale gain than someone who acquired the same stock recently at near-current prices.

Assets acquired as part of a prior country's exit tax — for example, someone who moved from Canada to the US and paid Canadian departure tax on assets, resulting in a stepped-up basis — should have that stepped-up basis recognized by the IRS as well, under treaty provisions. The US-Canada treaty explicitly supports this basis coordination.

How the $910,000 Exclusion Works

The exclusion isn't applied per asset — it's applied to total net gain across all deemed-sold assets. If you have:

• Stock A: $400,000 gain
• Stock B: $350,000 gain
• Stock C: ($80,000) loss
• Foreign property: $300,000 gain

Total net gain: $970,000. After the $910,000 exclusion, $60,000 is taxable. The taxes on $60,000 at applicable capital gains rates are modest.

But if stock A alone had a $1.5 million gain, $590,000 is taxable after the exclusion — a much larger number.

The exclusion is indexed for inflation annually and has been rising. It's not a fixed threshold, so checking the current year's amount before planning is essential.

Minimizing the Mark-to-Market Tax

Several strategies reduce exposure before the deemed-sale date:

Harvest losses: Selling assets with unrealized losses before expatriation reduces basis and adds losses to offset gains in the deemed sale. However, losses must be genuine — manufactured loss transactions are subject to IRS anti-abuse rules.

Time the disposal of appreciated assets: If you plan to sell a large holding anyway, selling before expatriation (as a US resident) rather than triggering it in the deemed sale can be more efficient — especially if you can spread the gain across multiple tax years.

Gifting: Gifts of appreciated assets to non-US-person spouses before expatriation remove them from the deemed sale, but gift tax rules apply above the annual exclusion ($18,000 per recipient in 2026) and the $175,000 spousal exclusion for non-citizen spouses.

Roth conversion of retirement accounts: Eliminates the full-income-tax treatment of traditional IRA balances under 877A, at the cost of paying income tax now at current rates.

None of these are simple, and they interact with each other in ways that require professional modeling. The Exit Tax Playbook includes country-by-country worksheets and sequencing guidance for managing the deemed-sale calculation alongside other jurisdictions' exit regimes.