PFIC Currency Translation: Spot Rates, Fund-Currency Math and Pence

By Edward Parsons, CPA · licensed since 2009

Key takeaways

• When PFIC distributions are paid in a foreign currency, section 1291 runs the excess distribution test in that currency and translates only the excess into dollars.
• Proposed regulations limit that to distributions all paid in one foreign currency. Otherwise the test runs in dollars.
• The current Form 8621 asks for a three-letter currency code above line 15a, and for the excess in US dollars on line 15e(2).
• Your gain on a sale is a dollar figure. A loss in pounds can be a gain in dollars.
• Many London prices are quoted in pence. Read them as pounds and the value is 100 times too high.
• The PFIC Calculator & Form 8621 Generator translates each transaction at that date’s spot rate, runs the 125% test in the fund’s own currency with only the excess translated, and values line 4 from a real year-end price.

You got this far. You know your fund is a PFIC. You know the 125% test: this year’s distributions against 125% of the average for the three years before. Maybe you live abroad and buy the fund in the currency you’re paid in. You’ve converted every figure into dollars, so it all lines up with the rest of your return.

That conversion is where most calculations go wrong. Not the rate. The order.

Which currency does the 125% test run in?

The currency the distributions were paid in, if they were all paid in one.

Section 1291(b)(3)(E) says that if distributions are received in a foreign currency, the excess distribution determinations are made in that currency, and the excess found in that currency is translated into dollars. Proposed Treas. Reg. §1.1291-2(d)(4), never finalized, sets out the detail. The general rule is dollars, with each distribution translated at the spot rate on the date it was made. The exception: if every distribution the test has to count was made in a single foreign currency, the test runs in that currency. Each ratable portion of the excess is then translated at the spot rate on the date of the distribution it’s allocated to. The current Form 8621 instructions repeat both rules and cite both sources.

Why it bites: convert first and the exchange rate gets a vote in the test. Picture a fund that paid the same amount in euros every year. In euros, there is no excess. Let the dollar weaken far enough, and this year’s payment, converted at this year’s rate, can top 125% of an average converted at older rates. That’s an excess that exists only in dollars. It runs the other way too, and then a real excess disappears.

The exception has an edge. If the fund switched the currency it pays in, not every distribution the test counts was made in one foreign currency, and under the proposed regulations the test falls back to dollars.

My guide to the PFIC 125% test, block by block covers the rest of that test.

What does Part V now ask for?

Two new entries. The current Form 8621 adds a line above 15a for a three-letter currency code: the currency used on lines 15a through 15e(1). Then line 15e(2) asks for the line 15e(1) amount, the excess distribution, in US dollars. If 15e(1) is already in dollars, you enter the same figure.

So the form now shows the work in the order the rule runs it: the test in the distribution currency, the excess in dollars. Line 16, which spreads the excess over your holding period, starts from the dollar figure on line 15e(2), or from the gain on line 15f.

Why is your gain in dollars different from your gain in the fund’s currency?

Because the tax is figured in dollars. Section 985 says tax determinations are made in your functional currency, and for most individual investors that’s the dollar.

Take a share bought for 100 pounds and sold for 95. That’s a loss in pounds. If the pound rose far enough against the dollar while you held it, it’s a gain in dollars, and a dollar gain on PFIC stock is treated as an excess distribution. The reverse happens too. A gain in pounds can be a loss in dollars, and a loss isn’t taken into account under section 1291. My guide to PFIC losses explains where that loss goes.

Every purchase, reinvested distribution and sale has its own date, and so its own rate. A monthly savings plan carries a different rate in every lot. See PFIC lot tracking.

Which value goes on line 4?

The value of your shares at the end of the year, sorted into dollar bands. Line 4 has boxes for $0 to $50,000, $50,001 to $100,000, $100,001 to $150,000 and $150,001 to $200,000. Above that, you list the value. The instructions let you rely on periodic account statements provided at least annually, unless you know or have reason to know they don’t reflect a reasonable estimate of value.

What the instructions don’t say is which exchange rate turns a euro statement into those dollar bands. The same year-end value feeds the $25,000 and $50,000 exception, measured on the last day of your tax year. Near that line, a translation error can decide whether you file at all. My guide to Form 8621 filing exceptions covers where each one stops.

Did you consider prices quoted in pence?

Many London listings are quoted in pence, not pounds. A data feed may label it GBX or GBp. Read a quote of 1,250 as pounds instead of pence and your holding is worth 100 times what it is. That’s enough to push a small position up through the value bands and past the filing threshold, and to wreck any gain figured from it. The number looks like a price, which is why the error survives.

Did you consider dates with no rate?

Treasury’s general definition of a spot rate, in Treas. Reg. §1.988-1(d), is a fair market rate available to the public for a spot trade in a free market. It gives examples of sources but doesn’t pick one, and most sources publish only for days the markets were open. A distribution paid on a local holiday, or a purchase dated on a day your source skipped, has no rate of its own. Something has to stand in for it, and across years of monthly purchases that choice adds up.

Did you consider a fund that isn’t priced in its home currency?

An Irish or Luxembourg fund can keep its books in euros, pay distributions in dollars on one share class, and trade in London in pence. Three currencies, one fund. Its home country doesn’t tell you which currency the 125% test runs in. The distributions do. Which country the fund is from is a separate question. See what makes a fund foreign for PFIC purposes.

Did you consider currency gain on the cash itself?

Distributions and sale proceeds often sit in a foreign-currency account before you spend or reinvest them. Under section 988, disposing of foreign currency, including a foreign-currency bank deposit, is a section 988 transaction, and its currency gain or loss is computed separately and treated as ordinary. Whether it reaches your account depends on your facts. That’s case analysis, not a Form 8621 line.

How the PFIC Calculator handles it

The PFIC Calculator & Form 8621 Generator translates each transaction at that date’s spot rate. It runs the 125% test in the fund’s own currency and translates only the excess. Year-end values use the year-end rate, and London prices quoted in pence are converted first. It values line 4 from a real year-end price and picks the right value box. When no price exists, it leaves the line blank rather than estimating.

What it won’t do is guess. Where your records leave something it cannot know, it flags it instead of filling the gap. And it computes section 1291 only, not mark-to-market or QEF results.

When to have a CPA look

If your fund has paid in more than one currency, if you hold London listings, or if translation puts you near the $25,000 line, add the optional CPA review. A CPA checks the calculator’s own workpapers before you file. It covers those workpapers only, not a return or forms prepared elsewhere.

The rest of the edge-case series

• PFIC Edge Cases: What Most Form 8621 Calculations Miss
• The PFIC Start-Up Exception: When a New Fund’s First Year Doesn’t Count
• Tainted and Clean PFIC Lots: One Fund, Two Tax Treatments
• PFIC Lot Tracking: Why Every Purchase Is Its Own Calculation
• Wash Sales and PFIC Shares: The Loss and Holding Period That Move
• Fund Mergers, Splits and Spin-Offs: PFIC Events That Don’t Look Like Sales
• ISIN, Listing or Charter: What Makes a Fund Foreign for PFIC Purposes
• The PFIC 125% Test, Block by Block
• The PFIC Interest Charge: Daily Allocation, Top Rates, Daily Compounding
• PFIC Losses: Why a Loss on One Block Doesn’t Offset a Gain on Another
• Form 8621 Filing Exceptions: Every One, and Where Each Stops

Glossary

• Spot rate: the exchange rate on a given date for an immediate currency trade. Treasury’s definition asks for a fair market rate available to the public.
• Functional currency: the currency tax determinations are made in. For most individual investors, the dollar.
• Currency code: the three-letter code entered above line 15a of Part V, naming the currency of lines 15a through 15e(1).
• Line 15e(2): the excess distribution in US dollars. Line 16 starts from it.
• GBX: the code for prices quoted in pence sterling. 100 pence make a pound.
• Line 4: the year-end value of your shares, reported in dollar bands on Part I.

Frequently asked questions

What exchange rate do I use for Form 8621?

For distributions, the spot rate on each distribution’s date. When every distribution the test counts is in one foreign currency, the proposed regulations run the test in that currency and translate each portion of the excess at the spot rate of its distribution date. The instructions don’t name a rate for the line 4 value.

Do I convert PFIC distributions to dollars before the 125% test?

Not when every distribution the test counts was paid in a single foreign currency. Section 1291(b)(3)(E) and the proposed regulations run the test in that currency and translate only the excess. If the distributions came in more than one currency, the general rule converts each one to dollars first.

What currency code goes on Form 8621 Part V?

The three-letter code of the currency used on lines 15a through 15e(1). Line 15e(2) then shows the excess distribution in US dollars.

Why does my PFIC gain in dollars differ from my gain in the fund’s currency?

Because your tax is figured in dollars, and the exchange rate moved between your purchase and your sale. A loss in the fund’s currency can be a gain in dollars, and that dollar gain is what section 1291 taxes.

What do London prices quoted in pence mean for Form 8621?

GBX or GBp means pence, and 100 pence make a pound. A pence price read as pounds overstates the value 100 times, which can change the line 4 value box, the $25,000 test and any gain figured from it.

Let the order of operations be the calculator’s job. The PFIC Calculator runs the test in the fund’s currency and translates only the excess. Add the optional CPA review of its workpapers if your fund has paid in more than one currency.