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By Edward Parsons, CPA · licensed since 2009
Key takeaways
- Treasury Regulation section 1.1298-1 holds about a dozen exceptions to the annual Form 8621 report. Each one has an edge.
- An exception relieves Part I, the annual report. It never relieves the section 1291 tax.
- The de minimis test counts all your PFIC stock on the last day of your tax year: $25,000, or $50,000 on a joint return.
- An excess distribution or a gain ends it for that fund, for that year, at any value.
- The PFIC Calculator & Form 8621 Generator tests the exceptions for every fund and every year.
You got this far. You know your fund is a PFIC, you know the 125% test, and you may have a spreadsheet that runs it. So the next question feels easy: do I have to file this year at all?
Most people answer with one number, $25,000. It is right, and it is one line in a list of about a dozen. My guides on whether you need to file Form 8621 and who must file Form 8621 cover the basics. This is the full map, with the point where each line stops.
What an exception relieves, and what it doesn’t
Section 1298(f) requires every US person who is a PFIC shareholder to file an annual report, “except as otherwise provided by the Secretary.” The exceptions are in Treasury Regulation section 1.1298-1, and the Form 8621 instructions call them “Exceptions To Filing Part I.” That is all they relieve. An election, or a QEF or mark-to-market inclusion, still needs a form.
None of them touches section 1291. A relieved year stays in your holding period. When a gain or an excess distribution comes, it is spread over every day you held the shares, and each earlier PFIC year carries deferred tax plus interest that compounds daily. The quiet years skip the paperwork, not the tax.
The $25,000 exception, word by word
Paragraph (c)(2) relieves a section 1291 fund for the year only if all three hold:
- On the last day of your tax year, all the PFIC stock you own, directly or indirectly, is worth $25,000 or less.
- During the year, you are not treated as receiving an excess distribution from that fund, or as recognizing a gain on a disposition of it.
- No QEF election has been made for that fund.
Here is where it stops.
It counts everything and relieves only some. QEF and mark-to-market stock count toward the total, but only section 1291 funds are relieved. Stock you own through another US person or another PFIC stays out of the total.
It looks at one day. Above the line all year and below it on the last day qualifies. The reverse doesn’t.
One event ends it for one fund. An excess distribution or a gain takes that fund out for the year. Your other funds can still qualify.
The word is “excess.” On the regulation’s terms, a distribution the 125% test clears doesn’t end the exception. You only know it cleared after running the 125% test, block by block, and the instructions separately list “certain direct or indirect distributions” as a reason to file. I look hard at any year with a distribution.
A gain on one block counts, even in a sale that lost money. A loss doesn’t reduce the gain subject to section 1291. See why one block’s loss doesn’t offset another’s gain. And the instructions treat stock as disposed of if it is “sold, transferred, or pledged.”
Joint filers: $50,000, combined
On a joint return the test is $50,000 for all the PFIC stock both spouses own, with every other condition intact. One spouse at $45,000 and the other at zero passes. The $50,000 figure exists only on a joint return.
Joint filers may file one Form 8621 for a PFIC that either or both own. Line 1 of the current form has a box: “Check if shares jointly owned with spouse.” The line 1 instructions say only to describe each class of shares.
Held through something else
Through another PFIC: the $5,000 rule. A section 1291 fund you own through another PFIC is relieved if your share of it is worth $5,000 or less at year-end, with the same no-excess-distribution, no-gain and no-QEF conditions. It covers only fund-of-funds holdings, and it needs the upper fund’s holdings, which you may not have.
Through a US entity: not the first US person. The annual report falls on the first US person in the chain. Hold through a US partnership, S corporation, trust or estate, and the entity generally reports. You report when you are treated as receiving an excess distribution or recognizing a gain through it, in a few election cases, or if the entity fails to file. And under the regulation’s Example 1, a slice of the same PFIC held through a foreign partnership is yours to report.
Every other exception, and its edge
| Exception | Paragraph | Where it stops |
|---|---|---|
| IRAs, 401(a), 403(b), 457(b), 529, 529A and Coverdell accounts, and exempt organizations | (c)(1) | Income taxable to the account under subchapter F. A tax-favored account abroad is not an IRA. |
| Foreign pension funds under a treaty | (c)(4) | The treaty must tax the income to you only when paid out. A “pension” label is not enough. |
| Dual residents treated as nonresidents under a treaty | (c)(5) | Only the period taxed as a nonresident, with Form 8833 on a timely return. |
| Bona fide residents of Guam, the Northern Mariana Islands or the US Virgin Islands | (c)(8) | Only if no IRS income tax return is required. Puerto Rico and American Samoa are not listed. |
| Beneficiaries of foreign estates and foreign trusts | (b)(3)(ii) | A QEF or mark-to-market election, or an excess distribution or gain through the estate or trust. |
| Grantors of bankruptcy liquidating trusts and widely held fixed investment trusts | (b)(3)(i) | The trust files instead. |
| Domestic partnerships owned only by exempt owners, treaty nonresidents or non-shareholders | (c)(6) | Any other owner. |
| Holdings of 30 days or fewer | (c)(7) | Bought this year or last, counted from 29 days before your tax year to 29 days after, with no excess distribution or gain. |
| Stock marked to market outside section 1296, such as under section 475 | (c)(3) | A year section 1291 applies to it under the coordination rule. |
| Years before the annual report took effect | (c)(9) | The annual report only. |
Not a US person. Section 1298(f) applies to “each United States person who is a shareholder,” so a year you weren’t one needs no report. A citizen abroad still is one. And the regulation handles part years only for treaty dual residents, so the year you arrived or left needs its own look.
Did you consider these four?
A gain on a tainted lot. Shares bought while the fund was a PFIC stay PFIC stock under the once a PFIC, always a PFIC rule. A gain on them in a year the fund passes neither test still ends the exception for that fund. See tainted and clean PFIC lots.
A few dollars of cash in lieu. Cash for a fractional share in a merger or reverse split usually counts as a sale of the fraction, and a gain on it is a gain. See fund mergers, splits and spin-offs.
The exchange rate on the last day. The threshold is in dollars. A fund priced in euros, or in pence in London, is valued in dollars on that one day, and the currency moves the answer as much as the price. See PFIC currency translation.
A start-up year. A new company’s first year with income escapes PFIC status only if it isn’t a PFIC in either of the next two years. Until then, you can’t be sure that fund stays out of your $25,000. See the PFIC start-up exception.
If an exception you relied on didn’t fit, the year needed a report, and the regulation says a missing report extends the IRS’s time to assess tax under section 6501(c)(8). See catching up on unfiled Forms 8621.
How the PFIC Calculator handles it
The PFIC Calculator works out the filing requirement for every fund and year. It applies the de minimis test across all your PFICs on the last day of the year, at $25,000 or $50,000 joint, and drops it in any year with an excess distribution or a gain. It checks eight other exceptions: indirect interests of $5,000 or less, not being the first US person, certain trusts and estates, treaty pensions, tax-exempt accounts, treaty dual residents, bona fide territory residents, and years you weren’t a US person. It marks jointly owned shares on line 1.
It won’t guess. It flags what it cannot know, leaves line 4 blank rather than estimate a missing price, and computes section 1291 only, not QEF or mark-to-market.
When to have a CPA look
A treaty, a trust or a year you arrived or left is judgment, not arithmetic. The calculator’s optional CPA review freezes your figures while a CPA reviews the workpapers it produced, before you file. It does not review a return or forms prepared elsewhere. See the calculator’s pricing section.
The rest of the edge-case series
- PFIC edge cases: what most Form 8621 calculations miss
- The PFIC start-up exception for a new fund’s first year
- Tainted and clean PFIC lots in one fund
- PFIC lot tracking, purchase by purchase
- Wash sales and PFIC shares
- Fund mergers, splits and spin-offs as PFIC events
- ISIN, listing or charter: what makes a fund foreign
- The PFIC 125% test, block by block
- The PFIC interest charge and daily compounding
- PFIC losses on Form 8621
- PFIC currency translation, spot rates and pence
Glossary
- Annual report: the yearly Form 8621 filing under section 1298(f). It is Part I of the form.
- De minimis exception: the $25,000 test, $50,000 on a joint return.
- Section 1291 fund: a PFIC with no QEF or mark-to-market election in effect for you.
- Excess distribution: distributions above 125% of the prior three-year average. A gain on a disposition is treated as one.
- First US person in the chain: the lowest-tier US owner in a chain of ownership, who generally files.
Frequently asked questions
Is the $25,000 PFIC exception per fund?
No. It is measured across all the PFIC stock you own on the last day of your tax year. Five funds at $6,000 each total $30,000, and none of them is relieved. The relief itself is per fund: a fund with an excess distribution or a gain that year files even when the total is under the line.
What is the PFIC reporting threshold for married couples filing jointly?
$50,000, for the combined value of all PFIC stock both spouses own, with every other condition still met. The $50,000 figure applies only to a joint return.
Does any distribution end the de minimis exception?
The regulation says an excess distribution does. A distribution the 125% test clears does not end it on the regulation’s terms, but the instructions also list “certain” distributions as a reason to file without saying which. Run the test before you rely on the exception.
Do I file Form 8621 for a PFIC inside my IRA?
Generally not. The regulation excuses IRAs and other listed tax-exempt accounts, and a US person who owns PFIC stock through one is not treated as a shareholder. That stops if the income would be taxable to the account under subchapter F.
If I qualify for an exception, do I owe nothing on the fund?
An exception relieves the annual report, not the tax. The relieved years stay in your holding period, and a later gain or excess distribution is spread across all of them, with tax and interest under section 1291.
I own a PFIC through a US partnership. Do I file?
Usually the partnership, as the first US person in the chain, files. You file in a year you are treated as receiving an excess distribution or recognizing a gain through it, or if the partnership fails to file.
Find out which of your years need a form. Load your funds into the PFIC Calculator and let it test the exceptions fund by fund and year by year, before you file anything.