When to Report Hedging Gains and Losses?

We had a reader send in the following questions:

“We have an accrual basis farm partnership, for income statement purposes we have used the mark to market approach to the value of the hedge which was at a gain. For income tax purposes can we report the gain or loss when the hedge is closed?”

Many farmers hedge their crops by using futures or futures options contracts.  For financial reporting purposes, these gains or losses are marked to market as of the balance sheet statement date.  The farmer would record a gain or loss based on the closing prices as of that date.

For income tax purposes, hedges are normally not reported until the hedge is closed.  In some cases, a farmer can make an election to mark-to-market their hedges, but normally, the farmer will elect to use the regular method since that allows them to report the gain or loss when the crop is sold (or feed purchased).

The Farm Financial Standards Council has issued new guidelines including a new hedging gain or loss reporting appendix.  If you are interested in getting the guidelines, you can access them at the website and I would highly recommend downloading them.  The cost is fairly minimal and you will get your value out of them very quickly.

Paul Neiffer, CPA