Wash Sales and PFIC Shares: The Loss and Holding Period That Move

By Edward Parsons, CPA · licensed since 2009

Key takeaways

• A loss on a section 1291 fund isn’t taken into account under section 1291, but the Form 8621 instructions say it may still be recognized elsewhere in the Code. That is where the wash sale rule applies.
• Buy substantially identical shares within 30 days before or after the loss sale and section 1091 disallows the loss. The loss moves into the basis of the replacement shares.
• Section 1223(3) adds the holding period of the shares you sold to the replacement shares, and section 1291 takes its holding period from section 1223.
• So a gain on shares you bought last month can be spread back over years of PFIC history, with tax at each year’s top rate plus interest.
• The tacked holding period can also taint a lot you thought was clean, and it reaches the 125% test.
• The PFIC Calculator & Form 8621 Generator applies the wash sale rule, moving a loss disallowed under section 1091 into the replacement shares and tacking their holding period to the shares sold.

You got this far. You know the fund is a PFIC. You know the 125% test, you know a gain on sale is taxed as an excess distribution, and you may already have a spreadsheet that runs it block by block.

Then, in a down year, you sold a losing lot to harvest the loss and bought back in a few weeks later, because you still like the fund.

Here is what most calculations miss. The loss may not be a loss this year. And the shares you bought back may not be new shares at all.

What happens to a loss on a PFIC?

Less than you’d hope, then more.

The Form 8621 instructions say, at line 15f, that a loss on stock of a section 1291 fund is not taken into account under section 1291. My guide to why a PFIC loss on one block doesn’t offset a gain on another covers that half.

The same line says the loss may be recognized under another provision of the Code. For most people that means a capital loss on the return, deducted under section 165. And a section 165 loss on stock is exactly what the wash sale rule switches off.

What does the wash sale rule do?

Section 1091(a) disallows a loss on the sale of stock if you acquire substantially identical stock within a window that opens 30 days before the sale and closes 30 days after it. A contract or option to acquire counts too.

The loss doesn’t vanish. Two things happen to it:

• Basis. Section 1091(d) sets the basis of the replacement shares by reference to the shares you sold, which carries the disallowed loss into them.
• Holding period. Section 1223(3) says the holding period of the replacement shares includes the period you held the shares you sold.

When the share counts don’t match, the regulations decide which replacement shares inherit the loss. Treas. Reg. §1.1091-1 matches them by order of acquisition, not by your preference.

For an ordinary stock, all of this is mostly a matter of timing. For a PFIC, the holding period is the base of the whole calculation.

Why the holding period is the part that bites

Section 1291(a)(3)(A) says the holding period for section 1291 “shall be determined under section 1223”. Neither of its two exceptions touches wash sales. So the tacked holding period is the one section 1291 uses.

Follow it through. When you later sell the replacement shares at a gain, section 1291 treats the gain as an excess distribution and allocates it ratably to each day of your holding period. Days in the current year, and days before the fund was a PFIC, are ordinary income. Days in earlier PFIC years are taxed at that year’s highest rate, with interest from that year’s due date, under section 1291(c).

Your holding period now starts on the day you bought the shares you sold. So a lot you have owned for six weeks can carry a gain that is spread back over years of PFIC history. The disallowed loss does come back, as basis, and it shrinks the gain. But whatever gain is left is allocated as if you had never sold. My guide to the daily allocation and the PFIC interest charge explains why the oldest years cost the most.

There is a holding period rule in the proposed regulations too, Prop. Reg. §1.1291-1(h). It is still only proposed, and the final regulation leaves that paragraph reserved. I don’t need it: the statute’s own cross-reference to section 1223 does the work.

Did you consider the reinvested distribution?

Many funds reinvest distributions automatically, and a reinvestment acquires new shares. If one lands within 30 days of a loss sale, before or after, it can be enough to disallow part of the loss. Those few shares then carry the basis adjustment and the old holding period.

The window also runs across year-end. A sale late in one year and a purchase early in the next still match.

And section 1091 doesn’t define “substantially identical”. A second share class of the same fund, or a US fund tracking the same index as the foreign fund you sold, is a judgment call.

Did you consider which lot you sold?

The wash sale rule needs to know which shares you sold, what they cost and when you bought them, and your broker may report the sale without lot detail. Match it to the wrong lot and the loss, the basis that moves and the holding period that tacks all come out wrong, along with every later gain on the replacement shares. My guide to PFIC lot tracking and FIFO explains why every purchase is its own calculation.

Did you consider that a clean lot can become tainted?

Section 1298(b)(1) treats your shares as PFIC stock if the company was a PFIC at any time during your holding period for those shares. Section 1223 applies, in its own words, “for purposes of this subtitle”, and section 1298 sits in the same subtitle.

Picture a fund that was a PFIC in earlier years and has since stopped meeting the tests. A fresh purchase today would normally be clean. A purchase that replaces shares sold at a loss within the window can bring the old holding period with it, PFIC years included. My guide to tainted and clean PFIC lots covers how one fund carries both, and the once a PFIC, always a PFIC rule covers why the taint lasts.

Did you consider the 125% test?

Section 1291(b)(2)(B) says there is no excess distribution in the taxable year your holding period in the shares begins. With a tacked holding period, that year may be long past, so the first-year relief you’d expect on a new purchase may not be there.

The base of the test is the average you received “in respect of such stock” over the three prior years. For shares you have only just bought, the statute doesn’t say cleanly how that base fits a holding period that started earlier. I treat that as an open question. My guide to the 125% test, block by block covers the test itself.

How the PFIC Calculator handles it

The PFIC Calculator & Form 8621 Generator applies the wash sale rule. When a loss is disallowed under section 1091, it moves the loss into the replacement shares, and their holding period tacks to the shares that were sold. Around that, it:

• matches sales lot by lot, and says so when it has to assume FIFO because your broker data has no lot detail;
• separates tainted lots from clean ones;
• keeps a loss on its own Part V, in brackets with no line 16 amounts, so it never nets against a gain on another block;
• allocates each gain by day across the full holding period, with tax at each prior year’s highest rate and interest.

What it won’t do is guess. It flags what it cannot know, such as shares with no basis or acquisition date, and it refuses to produce a figure when a rate or price is missing. It computes section 1291 only, not QEF or mark-to-market. And no calculator can tell you whether a different fund or share class is substantially identical to the one you sold. That call is yours.

When to have a CPA look

If you harvested a loss in a PFIC and bought back in, your figures depend on lot matching, a disallowed loss and a holding period that starts somewhere you didn’t expect. The calculator offers an optional CPA review: a CPA checks the calculator’s workpapers before you file. It covers the workpapers the calculator produced, not a return or forms prepared somewhere else. The price is in the calculator’s pricing section.

The rest of the edge-case series

• PFIC Edge Cases: What Most Form 8621 Calculations Miss, the overview of the whole series
• 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
• 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
• PFIC Currency Translation: Spot Rates, Fund-Currency Math and Pence
• Form 8621 Filing Exceptions: Every One, and Where Each Stops

Glossary

• Wash sale: a sale of stock at a loss when substantially identical stock is acquired within 30 days before or after it. Section 1091 disallows the loss.
• Substantially identical: the test for whether a purchase triggers the wash sale rule. Section 1091 doesn’t define it.
• Tacked holding period: a holding period that includes the time you held other property, here the shares you sold.
• Section 1291 fund: a PFIC taxed under the default rules of section 1291, because neither a QEF election from the start of your holding period nor a mark-to-market election covers it. See what a PFIC is.
• Excess distribution: the part of a year’s distributions above 125% of the average for the three prior years. A gain on sale is treated as one. See the PFIC excess distribution regime.

Frequently asked questions

Does the wash sale rule apply to PFIC shares?

It applies to the loss. A loss on a section 1291 fund isn’t taken into account under section 1291, but the Form 8621 instructions say it may be recognized under another provision of the Code. That recognized loss is a stock loss like any other, and section 1091 disallows it if you acquire substantially identical shares within 30 days before or after the sale.

Where does a disallowed PFIC loss go?

Into the basis of the replacement shares, under section 1091(d). You get the benefit when you dispose of them, as a smaller gain or a larger loss.

Does a wash sale change the holding period section 1291 uses?

Yes. Section 1291(a)(3)(A) says the section 1291 holding period is determined under section 1223, and section 1223(3) adds the holding period of the shares sold in a wash sale. So a later gain on the replacement shares is allocated across the combined period, including earlier PFIC years.

Can a reinvested distribution trigger a wash sale?

It can. A reinvestment acquires shares, and if it falls within 30 days before or after a loss sale it can disallow part of the loss. Those reinvested shares then take the basis adjustment and the tacked holding period.

Can a wash sale make a clean lot tainted?

It can. Section 1298(b)(1) treats shares as PFIC stock if the company was a PFIC at any time during your holding period, and a tacked holding period can reach back into years when the fund was a PFIC.

Harvested a loss in a PFIC? Check what moved. Let the PFIC Calculator apply the wash sale rule lot by lot, then read the workpapers before you file.