PFIC Losses: Why a Loss on One Block Doesn’t Offset a Gain on Another

By Edward Parsons, CPA · licensed since 2009

Key takeaways

• Gain on selling PFIC shares is treated as an excess distribution under section 1291. A loss is not taken into account under section 1291 at all.
• So a loss on one block doesn’t reduce the gain on another. The Form 8621 instructions say so plainly.
• The current Form 8621 asks for a separate Part V for each excess distribution and disposition. A loss goes on line 15f in brackets, and line 16 stays empty.
• The loss can still count elsewhere on your return, just not against the PFIC gain.
• Wash sales, lot matching, tainted lots and currency can each turn the loss you expected into something else.
• The PFIC Calculator & Form 8621 Generator shows a loss in brackets with no line 16 amounts, never lets it offset a gain on another block, and files a separate Part V for each block of shares, with a loss kept on its own Part V.

You got this far. You know your fund is a PFIC. You know a gain on a sale is taxed like an excess distribution, spread back over the days you held the shares, with interest on top. Maybe you’ve built the 125% test in a spreadsheet and checked it twice. Good. Most people never get that far.

Then you sold. Part of the position was up, part was down, and your broker shows one net figure. The gain and the loss seem to cancel.

They don’t. Here is what most calculations miss.

Why doesn’t a PFIC loss offset a PFIC gain?

Because section 1291 only looks at gains.

Section 1291(a)(2) says that when you dispose of PFIC stock, the excess distribution rules apply to any gain recognized, as if that gain were an excess distribution. It says nothing about losses. The Form 8621 instructions supply the other half, under line 15f. A loss on a disposition is “not taken into account under section 1291”, and so it does not reduce the total gain subject to section 1291. The loss may still be recognized under another provision of the Code, and reported that way.

Gain is figured share by share. Proposed Treas. Reg. §1.1291-3, never finalized, says so, and its preamble adds that a loss on one share does not offset the gain on another. The current instructions work the same way: when you sell shares with different holding periods, you complete line 15f for each block with the same holding period.

Why it bites: the two halves go to different places. Each gain is spread over its own block’s holding period. The part that lands in earlier PFIC years is taxed at the top rate for each of those years, with interest on that tax. The loss goes where losses on stock go under the general rules.

Picture two blocks of one fund, sold on the same day. One shows a gain of 10,000, the other a loss of 10,000. Your broker nets them to zero. Form 8621 doesn’t. It shows a 10,000 gain, spread back over that block’s years, and a separate 10,000 loss in brackets with nothing after it. A position that broke even can still produce deferred tax and an interest charge.

My guide to the PFIC excess distribution regime covers what happens to the gain next.

A mark-to-market election is a different regime with its own loss limits. Under section 1296, a decline in value is an ordinary loss only up to the gains already included in earlier years, the unreversed inclusions. My comparison of QEF, mark-to-market and section 1291 sets the three side by side. This guide is about section 1291, the default.

How many Part Vs does one sale need?

Often more than one.

The current Form 8621 says so at the top of Part V: complete a separate Part V for each excess distribution and disposition. A gain on line 15f goes on to line 16, which asks for a statement for each excess distribution and disposition, with the gain allocated to each day of the block’s holding period. A loss goes on line 15f in brackets, and line 16 is left blank.

So one sell order that reaches three blocks is three dispositions on the form, not one.

Small events count too. Cash paid for a fractional share after a merger or a split can be a disposition of that fraction. It’s tiny, but if it’s a gain, it’s a gain on a PFIC share. See fund mergers, splits and spin-offs.

Do gifts and transfers at death count?

Under the proposed regulations, yes, and that’s a trap of its own.

Section 1291(f) lets regulations require gain on a transfer of PFIC stock that would otherwise be tax-free. Proposed §1.1291-3 counts a gift and a transfer at death as dispositions. Proposed §1.1291-6 makes those, and other nonrecognition transfers, trigger gain unless an exception applies. Losses get no mirror image: a loss on such a transfer isn’t recognized unless another provision allows it.

These rules are proposed, not final. I treat them as the IRS’s stated view, not settled law. The current instructions, separately, count a pledge as a disposition.

Did you consider a wash sale?

If you bought the same fund again within 30 days before or after selling at a loss, section 1091 disallows the loss. It doesn’t disappear. It moves into the basis of the replacement shares, and under section 1223(3) those shares take on the holding period of the shares you sold.

Section 1291 uses that holding period. The higher basis shrinks a later gain, but the older holding period spreads what’s left back over more PFIC years. See wash sales and PFIC shares.

Did you consider which lots the sale hit?

Whether a sale shows a gain or a loss depends on which shares went. A position built in monthly installments has lots at many prices. Match the same sale to different lots and one answer is a gain, another a loss. If your broker’s records don’t say which lots went, something has to be assumed, and the assumption decides the tax. See PFIC lot tracking.

Did you consider a tainted lot sold in a year the fund wasn’t a PFIC?

A fund can stop passing the PFIC tests. Your older shares don’t come clean because it did. Under section 1298(b)(1), stock is treated as PFIC stock if the company was a PFIC at any time during your holding period, unless you made a purging election. That’s the once a PFIC, always a PFIC rule.

So a gain on a tainted lot, sold in a year the fund passed neither test, is still a section 1291 gain. A lot bought after the fund stopped being a PFIC can be clean, and its gain is taxed like any other share sale. One fund, one sale, two treatments. See tainted and clean PFIC lots.

Did you consider currency?

If the fund trades in euros or pounds, your gain or loss for US tax is figured in dollars. A sale that lost money in pounds can be a gain in dollars, if the pound rose against the dollar while you held the shares. That dollar gain is what section 1291 taxes. It works the other way too. See PFIC currency translation.

How the PFIC Calculator handles it

The PFIC Calculator & Form 8621 Generator treats a loss the way section 1291 does. A loss shows on line 15f in brackets, with no line 16 amounts, and it never offsets a gain on another block. It files a separate Part V for each block of shares, as the Form 8621 instructions describe, and keeps a loss on its own Part V so it never nets against a gain.

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 sales cross many blocks, if a wash sale or a merger sits in the middle of the history, or if the amounts are large, 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 Currency Translation: Spot Rates, Fund-Currency Math and Pence
• Form 8621 Filing Exceptions: Every One, and Where Each Stops

Glossary

• Excess distribution: the part of a year’s distributions above 125% of the average for the three prior years. Under section 1291, a gain on a sale is treated as one.
• Block: shares of one fund with the same holding period, usually one purchase. Form 8621 works block by block.
• Disposition: a sale or other transfer of PFIC shares. The instructions include a pledge. The proposed regulations include a gift and a transfer at death.
• Line 15f: the Part V line for the gain or loss on a disposition. A gain continues to line 16. A loss goes in brackets and stops there.
• Wash sale: a sale at a loss with substantially identical shares bought within 30 days before or after. Section 1091 disallows the loss and moves it into the replacement shares.
• PFIC: a passive foreign investment company, including most foreign mutual funds and ETFs. See what a PFIC is.

Frequently asked questions

Can a PFIC loss offset a PFIC gain?

Not under section 1291. The Form 8621 instructions say a loss on a disposition is not taken into account under section 1291 and does not reduce the total gain subject to section 1291. Each block’s gain is allocated and taxed on its own.

Is a loss on PFIC shares deductible at all?

It can be. The instructions say the loss may be recognized under another provision of the Code and reported accordingly. It just can’t reduce a section 1291 gain. A wash sale can still disallow it and move it into the replacement shares.

How do I show a PFIC loss on Form 8621?

On line 15f of Part V, in brackets, as the form directs. You don’t complete line 16 for a loss, so it carries no allocation, no deferred tax and no interest.

How many Part Vs do I need for one sale?

The current Form 8621 asks for a separate Part V for each excess distribution and disposition, and the instructions ask for line 15f for each block of shares with the same holding period. A sale that reaches several blocks usually means several Part Vs.

Does a gift of PFIC shares count as a disposition?

Under proposed regulations that were never finalized, yes. They treat a gift, a transfer at death and most other nonrecognition transfers as dispositions that can trigger gain, unless an exception applies. A loss on such a transfer generally isn’t recognized.

Net nothing you can’t net. Let the PFIC Calculator keep every block separate and file each Part V on its own, then add the optional CPA review of its workpapers if the history is messy.