What Is Form 8621?

Form 8621 is a U.S. tax form used to report income, gains, and other information from a Passive Foreign Investment Company (PFIC). U.S. taxpayers with direct or indirect ownership in a PFIC must file it to avoid punitive tax treatment and interest charges.

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Manual Excel Filing vs. Form 8621 Calculator™:
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Section 1291 is the default—and harshest—method of PFIC taxation, treating gains and excess distributions as if they were received evenly over the holding period and taxing them at the highest rate for each prior year. Calculating the resulting tax and interest is notoriously complex, but our software can handle it in minutes, saving you time and frustration.

All PFICs that do not currently have Mark to Market or Qualifying Electing Fund elections are taxed under § 1291 of the Internal Revenue Code. § 1291 taxation is very complex and convoluted but the basic premise is that the taxpayer will be treated as if any gain in the investment were received evenly over the period of ownership and that the taxpayer was in the highest tax bracket during each year other than the current. Ultimately gain is taxed at either the taxpayer’s marginal rate for the current tax year or at the top tax rate for all earlier years which has been 35% for many years prior to 2013 when the rate rose to 39.6%, in addition interest will be added to the tax attributed to years before the current.

§ 1291 taxation will always be imposed on distributions/income received during the year and can be elected to “purge” or clear the investment of the current unrealized gain to make way for a M2M or QEF election which would not include backward looking taxation at top rates.

To arrive at the amount of income that will be taxed as § 1291 income you must determine the amount of excess distributions each year. No gain allocated to 1986 and earlier will be PFIC income subject to taxation as an excess distribution since the regulations did not take effect until 1987. All income from the sale or disposition of a PFIC is an excess distribution. The amount by which annual income/distributions exceed 125% of the average non-excess distributions received in the prior 3 years- meaning the amount that was previously included as ordinary income not subject to the high rate of taxation. Excess distributions are calculated per share so things can become confusing when there are multiple purchases.

Once the total amount of the excess distribution has been determined, you must ratably allocate the amount to each share based on the length of ownership and further to 3 distinct periods- each with its own set of rules:

• Pre-PFIC
• Prior year PFIC
• Current year

Here are some basics:

• § 1291 is the default method of taxation for PFICs
• The taxpayer may choose to impose § 1291 tax on phantom income or income that has not been received yet.
• Any income or gain allocated to years before 1987 is not PFIC income
• § 1291 income may be taxed as ordinary income or at the highest tax rate of a prior tax year plus interest.
• § 1291 never receives reduced taxation as a capital gain
• Unrealized losses cannot offset unrealized gains
• Losses cannot be recognized until they are realized
• Gain/loss must be calculated for each share (or block of shares purchased at the same time)
• Excess distributions must be calculated for each share (or block of shares purchased at the same time)
• Cost basis must be maintained for each share (or block of shares purchased at the same time)

There is really no way around the punitive § 1291 taxation since any direct or indirect disposition of PFIC shares including gifting, death, renouncing US citizenship and becoming a non-resident alien by moving out of the country all trigger the deemed disposition rules in § 1291. That being said- there is room for argument on these “deemed” dispositions for those who are savvy enough and have the fortitude to challenge the interpretation of the Regs.

Disclaimer
Information provided by Expat Tax Tools, Inc. on this site is not to be construed as legal, tax, or accounting advice. Every effort is made to provide current and accurate information but tax laws and regulations can change and errors can occur. This information is provided “as is” with no guarantees of completeness or accuracy and without warranties of any kind- express or implicit.

The Mark-to-Market election under §1296 is a more favorable PFIC tax method than §1291, though not as beneficial as a QEF. It requires tracking annual gains, losses, and basis adjustments per share—a complex process made simple by our software, which handles the regulations, calculations, and tracking with the ease of checking a box.

The Mark to Market election under §1296 is an optional method of PFIC taxation that is better than §1291 but not as tax friendly as QEF. In a nutshell- any unrealized gain in the PFIC during the tax year is included in the shareholder’s income as ordinary income. If the investment has lost value over the year losses are allowed but only to the extent of “unreversed inclusions” or previously included gain. When the PFIC is sold gains are ordinary income and losses are either ordinary or capital depending on the situation.

When a Mark to Market election is made the taxpayer is required to “purge” any prior gain in the PFIC by doing a deemed disposition under §1291 rules and paying any §1291 tax and interest prior to the election taking effect. This means that the entire investment is treated as if it were sold for fair market value (FMV) on Dec 31 (last day of the taxpayer’s tax year). All shares that have a gain will be taxed as excess distributions meaning that gain allocated to the current tax year will be included on the tax return as ordinary income and any gain allocated to years before the current one will be taxed at the highest tax rate for that year and an additional interest charge will be added. Any shares that have dropped in value due to either the performance of the investment or fluctuation in the currency exchange rates will be disregarded- no losses are allowed in a §1291 “purge”. Losses can only be recognized when they are realized.

Although the form line instructions look easy- they are not. You are required to prepare a separate Part IV (2015 Form 8621) for each share or block of shares purchased at the same time. All basis, gain, loss, and unreversed inclusions must be tracked per share. This becomes tedious and overwhelming when the fund reinvests dividends monthly to purchase more shares, or the shareholder sells shares each month as part of a retirement income plan- or Heaven forbid- a mutual fund pays monthly dividends and reinvests them and also sells shares and distributes the cash every month. Remember – the rule is FIFO-first in first out- so you cannot offset the purchases and distributions in a year and just deal with whatever is left over.

Only PFICs that are marketable securities are eligible to make a Mark to Market election. Mark to Market elections can only be made on a timely filed tax return. Once made it remains in effect for all subsequent years and Form 8621 is required annually.

Disclaimer
Information provided by Expat Tax Tools, Inc. on this site is not to be construed as legal, tax, or accounting advice. Every effort is made to provide current and accurate information but tax laws and regulations can change and errors can occur. This information is provided “as is” with no guarantees of completeness or accuracy and without warranties of any kind- express or implicit.

The QEF election under §1295 offers the most favorable PFIC tax treatment, resembling U.S. mutual fund taxation and allowing capital gains treatment—if prior §1291 gains are addressed. Though it involves phantom income and detailed per-share tracking, our Form 8621 calculator simplifies both Pedigreed and Unpedigreed QEF calculations, even when tax years don’t align.

The QEF or Qualified Electing Fund election under §1295 is optional method of taxation available for certain PFICs. This election most closely mirrors the US taxation of US mutual funds and allows for capital gains treatment of some of the income as long as any prior §1291 gain has been dealt with. Choosing not to purge the §1291 gain when making the QEF election is possible, but doesn’t necessarily accomplish much since you are required to treat any disposition as if it were sold under the punitive default taxation method. Once the election has been made Form 8621 is required to be filed each year and the election will remain in place for all subsequent years.

Not all PFICs are eligible for Qualified Electing Fund status. In order for a mutual fund or other PFIC investment to allow for Qualified Electing Fund treatment by the shareholders it must jump through some hoops for the IRS. The PFIC must maintain books under IRS acceptable accounting procedures and compute gain, loss and income each year using those same principles. The PFIC is also required to provide a “PFIC Annual Information Statement” to its investor’s each year providing not only the amount of income to include on Form 8621 but other specific required attestations. If no annual statement is provided to the taxpayer- no QEF election can be made.

Essentially a Qualified Electing Fund looks like a partnership where the income retains its character and is reported by the shareholder each year whether they receive it or not and gains and losses on sales are treated as capital gains and losses- with some distinct differences. Losses will not flow through to the investor during the period of ownership, they are simply disregarded or put on hold. Cost basis is tracked per share and which must be adjusted up and down each year in accordance with income allocated to the taxpayer on the annual statement and actual distributions received.

There are two types of Qualified Electing Fund PFICs- pedigreed and unpedigreed. The distinction between them being whether there are any years before the election was made that is still subject to §1291 taxation. Until a QEF or mark to market election is made, all PFICs will default to taxation under §1291. When a QEF election is made the taxpayer has the option to “purge” any prior gain in the PFIC by doing a deemed disposition under §1291 rules and paying any §1291 tax and interest; or just making the QEF election and dealing with the §1291 rules when the investment is actually sold. The latter is not generally a tax efficient solution- but there are situations where it could work well.

The QEF election involves including the ordinary income and capital gains in the shareholder’s income each year –even if the money was not actually received. Making the election will allow gains on disposition of pedigreed QEFs to be taxed as capital gains when they are sold. There is a glitch in the current regulations that would require a current 8621 and an amended 8621 to be filed for any year in which a PFIC reports its annual statement using a fiscal year and a calendar year shareholder sells shares between the end of the PFIC fiscal year and December 31.

Check out our article on the mismatch of gain recognition and basis adjustment by clicking on the link below.
The trouble with QEF reporting

Disclaimer
Information provided by Expat Tax Tools, Inc. on this site is not to be construed as legal, tax, or accounting advice. Every effort is made to provide current and accurate information but tax laws and regulations can change and errors can occur. This information is provided “as is” with no guarantees of completeness or accuracy and without warranties of any kind- express or implicit.

A deemed sale allows taxpayers making a QEF election to “purge” prior PFIC gains by recognizing them under §1291 and paying the associated tax and interest. If skipped, §1291 rules apply upon actual sale—but with our software, making the election is as easy as checking a box, automatically switching to pedigreed QEF calculations.

Did your client just become subject to U.S. taxation? By applying the transitional rule and making a Mark-to-Market election in that first year, you can avoid §1291 tax on built-in gains and step up the PFIC’s basis to fair market value. Our Form 8621 Calculator handles this automatically—just enter the value on the date of change.

So what happens when a foreign person moves to the US and becomes a US taxpayer? Is a lifetime of good investing all of a sudden going to be wiped out by the PFIC rules? The good news is –absolutely not. The PFIC regulations include step-by-step transitional rules for people who are new US taxpayers.

First a quick review of a few key points:

1. Non-resident aliens can’t own PFICs. The passive foreign investment company rules do not apply to anyone who is not subject to US taxation as a resident. Any unrealized gain prior to the transition to US taxpayer does not necessarily have to be subjected to section 1291 (but without good planning it could be).
2. The basis of assets owned by non-resident aliens moving to the US do not automatically step-up to FMV on the day they become a US taxpayer. Don’t believe me?- give a read to Revenue Ruling 55-62 which talks about cows, but if you substitute PFIC every time the word cow is used you will see what I mean. But you can sometimes find a way- and this is one of those times!

Now that we have that out of the way- the transitional rule is pretty clear about how you need to do the math when a non-resident alien becomes a US person while owning a PFIC. There is a special rule to allow the basis to step up to the larger of adjusted basis or FMV on the date the person becomes a US resident taxpayer.

Be mindful when you have a client who has just become subject to the Internal Revenue Code as a resident taxpayer. Making a Mark to Market election in the first year will ensure that the investment will never be subjected to the nasty §1291 taxation. If the election is not made in the first year you risk making unrealized gain that otherwise would be subject to tax as ordinary income a victim of 1291 taxation at a rate of 39.6%.

The special inbound transition rule for a stepped-up basis found in §1296(l) can only be invoked if the person makes a mark to market election in the first year a person is subject to US taxation as a resident. Taxation on the prior appreciation is deferred until there is a disposition and will be taxed under §1001 at that time.

Consider the example of a Canadian taxpayer who becomes a US resident taxpayer on January 1, 2013. They enter the US with a Canadian mutual fund that they have owned since Dec 31, 2007 (5 years) and has an unrealized gain of $10,000 USD. If they make a mark to market election in 2013 (their first year in the US)they will have no income from the PFIC in 2013 (assuming there are no distributions or appreciation during 2013), and the basis for purposes of the MTM PFIC rules is the higher of the adjusted basis or FMV on January 1, 2013. When the taxpayer eventually sells the investment the $10,000 of pre-PFIC gain is taxed under IRC §1001 as long term capital gain.

If they decide to wait and not do anything and then 5 years later they sell the entire PFIC, and assuming the unrealized gain is still $10,000, the taxpayer now has to calculate the taxes under the 1291 rules and a portion of the prior appreciation is now subject to punitive taxation. Instead of -0- income and a $10,000 long term capital gain later- the taxpayer has $6000 in ordinary income ($5,000 of pre-PFIC gain taxed as ordinary income, $1,000 current year PFIC gain taxed as ordinary income and the remaining $4,000 of unrealized gain is allocated to the prior years it was a PFIC- generating $1537 in 1291 tax for the PFIC years onto which $136 interest will be added.

Did your client just become not subject to U.S. taxation? Under temporary regs, PFICs are treated as sold on the last day the taxpayer is a U.S. person—triggering a deemed disposition. Our Form 8621 Calculator makes this easy, automatically handling the calculations so you can ensure compliance without the hassle.

• User Guide (being updated)

• QEF Election & Deemed Sale Election
• Excel Import (Transaction History)

• Mark to Market with 1291 purge example

Form 8621 Calculator – Excel Import Guide

Importing an excel document directly into the calculator is not supported. In order to transfer the data first you must convert your file into a “csv” text base file.

Converting XLS, XLSX files to CSV

Open your excel document and select the worksheet you want to convert.

Go to the “File” menu and select the “Save As” option

Select the folder where you would like to save the file and change the file type to CSV (MS-DOS).
(Note that if your file is in a MAC format you may need to make adjustments to your dates).

"Save"

As excel workbooks can contain formulas, macros and other special features, you may get a warning that these will be lost when converting the file to a CSV format.

Select “Yes” to continue.

Importing The CSV File into the Calculator

STEP 1

Go to the transaction history of the fund

Click on the import icon

Choose your file and click on the “Upload” button.

STEP 2

In order to import, you first must map the columns in your document to specify which columns contain the Date, Transaction Type, Units, Amounts and the start row.

It is not necessary to filter your spreadsheets to filter out each investment at the export. You can simply enter the column number that has the name of the investment listed in. If your sheet contains
only one investment you can leave this field blank.

Specify on which row the data actually starts on.

                                                                             Preview of your document showing the first 10 rows

In our case we make the following entries:

Select the “Submit” button to continue.

STEP 3

Date Preview

Please ensure that the dates were properly recognized. If not, you must go back to your excel file and
adjust the date format to “YYYY-MM-DD”

Select the investment you would like to import

Consolidated Import Option

If you would like to consolidate similar transactions on the same date into one block, select this option.

For example: Purchase of 1,000 shares on Jan 5, 2010 and another purchase of 500 shares on Jan 5,
2010 will be imported as Purchase of 1,500 shares on Jan 5, 2010.

Set the transaction types

The calculator supports the following transaction types: Purchase, Distribution, Reinvestment, Sale,
Return of Capital, Cost Base Adjustment.

Select N/A if any of the transaction types does not apply to this fund and it will be skipped at import.

U.S. Years

Select all years the client has filed a US return.

Click the “Submit” button to complete the import process.

Revision December 2025

New Part V lines on page 3 of Form 8621. In the entry space provided for the new line above line 15a, filers are required to enter a three-letter currency code.

New line 15e(2) requests filers to report the line 15e(1) amount in U.S. dollars. If the amount on line 15e(1) is in a foreign currency, filers must convert the amount to U.S. dollars.

Line 15 Instruction changes:
In the entry space provided above line 15a, enter the three-letter currency code of the currency used on lines 15a through 15e(1).

Currency codes are available at https://www.six-group.com/en/products-services/financial-information/data-standards.html#scrollTo=currency-codes

The excess distribution must be determined in a single currency. In general, the excess distribution must be calculated in U.S. dollars. Each distribution is translated into the U.S. dollar at the spot rate on the date on which such distribution is made. However, if all distributions that must be taken into account for purposes of calculating the excess distribution are made in a single foreign currency, the excess distribution must be calculated in the currency in which the distributions are made. Each ratable portion of a total excess distribution determined in such foreign currency is then translated into U.S dollars at the spot rate on the date of the distribution to which the ratable portion is allocated. See section 1291(b)(3)(E) and Proposed Regulations section 1.1291-2(d)(4).

Line 15e(1)

Nonexcess distribution. The nonexcess distribution is the lesser of line 15a or line 15d. This amount is taxed according to the rules of section 301. To the extent that section 301(c)(1) is applicable, include the amount as a dividend on your income tax return. For corporations, include this amount on Form 1120, Schedule C, line 14. For individuals, include this amount on Form 1040, line 3b (and, if applicable, on Schedule B (Form 1040), line 5).

Excess distributions. If you received more than one distribution during the tax year with respect to the applicable stock, the excess distribution is apportioned among all actual distributions. Each apportioned amount is treated as a separate excess distribution.

Form 8621 & Instructions

Future Developments

For the latest information about developments relating to Form 8621, and its instructions, such as legislation enacted after they were published, go to www.irs.gov/form8621.

Careful attention must be paid when you are working with taxpayer’s who also file U.S. state tax returns. You will have to determine how two independent yet interrelated tax codes will work together when you are dealing with passive foreign investment company income. Issues will include the timing of when gain or loss is recognized, the character of the income inclusions or deductions, capital loss carry forwards and differences in adjusted cost base.

Not all states include PFIC income in the same year as the federal, nor do they always characterize the income the same way. Very often the income that you are including on federal Form 8621 is phantom income, and states vary widely in how they see the taxation of non-realized investment income.

California for example comes right out and says the Franchise Tax Board does not recognize IRC §1291-1298. For California purposes a foreign corporation is treated as a regular corporation. Income will not be recognized, nor taxes imposed, until a distribution is received or a disposition has occurred. Ohio, on the other hand, works on the same timing as the IRS for income inclusion will recognize income in the same year the IRS does. California’s treatment will create a different cost basis for federal and state tax purposes and potentially a mismatch of capital loss carryforwards.

Also consider under §1291 that some of the income does not show up on Form 1040 as part of taxable income yet it is treated as if it has because an extra tax on this income is on page 2 of the 1040. What do you have to do if the state begins their computation of taxable income with the federal AGI? Will this create an understatement of income? You may have to add all or part of the excess distributions subject to the highest rate of taxation into state income before you calculate the tax. Wisconsin provides clear instructions that excess distributions from PFIC investments not included in federal income are an addition to income on Form 1 line 4 Code 05. Others are just silent on the matter and it is up to you to figure out.

The main issues with PFIC taxation at the state level are:

• determining when state adjustments are required to accurately reflect state income;
• how to recognize when state and federal basis may be different due to timing of income inclusions; and
• lack of guidance by many state tax codes.

For more insight information, read the following article by Mary Beth Lougen (COO of Expat Tax Tools, Inc):
The Nightmare of PFICs at the State Level – Answers to FAQs

Disclaimer
Information provided by Expat Tax Tools, Inc. on this site is not to be construed as legal, tax, or accounting advice. Every effort is made to provide current and accurate information but tax laws and regulations can change and errors can occur. This information is provided “as is” with no guarantees of completeness or accuracy and without warranties of any kind- express or implicit.

A revenue procedure is an official statement of a procedure published in the Bulletin that either affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code and related statutes, treaties, and regulations or, although not necessarily affecting the rights and duties of the public, should be a matter of public knowledge.

Disclaimer
Information provided by Expat Tax Tools, Inc. on this site is not to be construed as legal, tax, or accounting advice. Every effort is made to provide current and accurate information but tax laws and regulations can change and errors can occur. This information is provided “as is” with no guarantees of completeness or accuracy and without warranties of any kind- express or implicit.

Disclaimer
Information provided by Expat Tax Tools, Inc. on this site is not to be construed as legal, tax, or accounting advice. Every effort is made to provide current and accurate information but tax laws and regulations can change and errors can occur. This information is provided “as is” with no guarantees of completeness or accuracy and without warranties of any kind- express or implicit.