How PFICs are taxed: default rules, QEF and mark-to-market
There are three main ways a PFIC can be taxed. Which applies depends on elections, timing and the information available.
The default rules
If no election applies, a PFIC is taxed under the excess-distribution rules. They apply when you sell the shares or receive an excess distribution, which is generally the part of a distribution above 125% of the average of the prior three years.
- The gain or excess distribution is allocated across your holding period.
- Amounts allocated to prior PFIC years are generally taxed at the highest rate in effect for each of those years, plus an interest charge.
- Amounts allocated to the current year and to pre-PFIC years are generally taxed as ordinary income.
Long-term capital gain rates generally do not apply to these amounts. Interest is not billed simply for holding the fund. It arises as part of the calculation when an excess distribution or gain occurs.
The QEF election
With a Qualified Electing Fund election, you include your share of the fund's ordinary earnings and net capital gain each year, potentially without receiving cash. Net capital gain keeps its character.
- The fund must provide the required annual information, which many foreign funds do not.
- Election timing matters.
- A late election does not automatically remove prior-year PFIC exposure.
The mark-to-market election
This election is available only for eligible marketable stock, such as stock regularly traded on a qualifying exchange.
- Annual appreciation above your adjusted basis is included as ordinary income.
- Losses are deductible only to a limited extent, generally up to prior mark-to-market inclusions.
- If you held the fund before making the election, the first year can carry transition consequences under the default rules.
It does not fix prior years automatically, and it is not available for every fund.
The right treatment depends on the specific holding, your holding period, the fund information available and your plans. It needs analysis by a qualified U.S. international tax professional.
Disposal is a separate decision
Selling a PFIC is itself taxable under these rules and, under the default method, can bring several years of allocation into one calculation. It is a decision that needs analysis, not a guaranteed way out. Your local tax position matters too.
Before you act
Gather your purchase dates, costs, distributions and any fund statements. Then review reporting and elections with a qualified tax professional, and portfolio decisions with an appropriately authorized investment advisor.
Not sure how this applies to you?
PFIC questions need coordinated tax and investment expertise. A qualified U.S. international tax professional can assess reporting and elections, while an appropriately authorized investment advisor can help evaluate portfolio decisions.
This guide is general education, not individualized tax, legal or investment advice. PFIC rules are complex and fact-specific. Speak with a qualified professional about your own situation before acting.