PFIC Lot Tracking: Why Every Purchase Is Its Own Calculation

By Edward Parsons, CPA · licensed since 2009

Key takeaways

• Section 1291 runs share by share. Only shares with the same holding period may be grouped.
• Every purchase starts its own block. So does every reinvested distribution, because it buys new shares on its own date.
• The current Form 8621 wants a separate Part V for each excess distribution and disposition, with the 125% test run block by block.
• If you didn’t identify the lot when you sold, Treas. Reg. §1.1012-1(c) charges the sale to your earliest lot, for basis and holding period.
• The average cost on a foreign statement has no dates in it. Section 1291 needs a date for every share.
• The PFIC Calculator & Form 8621 Generator matches sales lot by lot, says when it assumed FIFO, and flags what it can’t know instead of guessing.

You got this far. You know the fund is a PFIC. You know the 125% test, and you may have built the spreadsheet: one row per year, distributions in one column, the three-year average in the next. Most people never get that far.

But the Code doesn’t run per fund, and it doesn’t run per year. It runs per share. Here is what most calculations miss.

Why is every purchase its own PFIC calculation?

Because section 1291 is written share by share. Section 1291(b)(3)(A) says the excess distribution is determined “on a share-by-share basis, except that shares with the same holding period may be aggregated.” The holding period comes from section 1223, under section 1291(a)(3)(A). Shares bought on the same day can share a calculation. Shares bought on different days can’t.

So every purchase opens a new block. So does every reinvested distribution: the cash buys new shares on the day it is reinvested. A fund that pays monthly into a reinvestment plan adds twelve blocks a year. A nontaxable stock dividend is different, because section 1223(4) can carry the old holding period across and section 1291(b)(3)(B) calls for its own adjustments.

Each block then gets its own everything:

• Its own 125% test, against what that block received in the three prior years. See the PFIC 125% test, block by block.
• Its own first year, in which it has no excess distribution at all.
• Its own day count. An excess distribution or a gain is spread over that block’s days, not the fund’s.
• Its own taint status. One block can be PFIC stock and the next one clean. See tainted and clean PFIC lots.

What does Form 8621 want for each block?

More pages than most people expect. The current form opens Part V with: “Complete a separate Part V for each excess distribution and disposition.” The Form 8621 instructions apply that block by block. A distribution on shares with different holding periods gets lines 15a to 15e completed separately for each block. A sale gets line 15f for each block. And the line 16a statement has to show “your holding period for each share of stock or block of shares held.”

So one fund in one year can need several Part Vs, and a single sale that cuts across three blocks needs line 15f three times.

Which shares did you sell?

The ones you identified at the time, or else the oldest.

Under Treas. Reg. §1.1012-1(c), shares you don’t adequately identify are charged against your earliest lot “to determine the basis and holding period of the stock.” For shares at a broker, identifying means telling the broker which shares at the time of sale and getting written confirmation within a reasonable time. Choosing a lot at tax time doesn’t count.

For an ordinary stock, FIFO decides your basis and whether the gain is long-term. For a PFIC it moves the whole calculation. The oldest lot has the longest holding period, so a larger share of its gain lands in prior years, at prior years’ top rates, with interest running the longest. If the fund changed status, the oldest lot is also the one most likely to be tainted.

Can you use the average cost on your foreign statement?

Usually not, and it hides the one thing section 1291 needs.

Treas. Reg. §1.1012-1(e) allows the average basis method for two kinds of shares left with a custodian: shares of a regulated investment company, and shares acquired through a qualifying dividend reinvestment plan. The regulation defines a regulated investment company as a domestic corporation registered as an investment company in the United States. A foreign fund isn’t domestic, so that route is closed. The plan route has its own conditions, starting with a written plan that reinvests at least 10% of every dividend. An average printed on a foreign statement tells you none of that.

Then the deeper problem. Even where average basis applies, the regulation averages “regardless of holding period” and treats the first shares bought as the first sold. Section 1291 spreads each gain over each share’s own days. An average cost line has no dates in it. It blends old lots and new, tainted and clean, into one number, and the holding periods the form asks for are gone.

What can’t a lot ledger know?

Three gaps show up again and again, and each one throws off every block after it.

• Shares transferred in with no basis or date. A move between your own accounts keeps the original cost and date, but the receiving statement often shows neither. A gift is harder: section 1223(2) can hand you the giver’s holding period, and section 1291(b)(3)(D) counts the giver’s distributions in your 125% test.
• A balance that goes negative. The ledger shows you selling more than you held. Something is missing: a purchase, a transfer in, a split.
• A distribution on a date with no shares held. Often a payment that lands after the shares were sold, or a purchase missing from the export. Either way the ledger can’t place it in a block without help.

Did you consider a wash sale?

A loss disallowed under section 1091 moves into the replacement shares’ basis, and section 1223(3) adds the old shares’ holding period to the new ones. A lot you bought last month can carry a holding period that started long before. That changes its day count, and it can change whether it is tainted. See wash sales and PFIC shares.

Did you consider splits and mergers?

Section 1291(b)(3)(B) calls for proper adjustments for splits and stock dividends in the 125% test. A merger can swap every lot for new shares, with the old holding periods carried across under section 1223(1). Miss either and every block after it is wrong. See fund mergers, splits and spin-offs.

Did you consider the exchange rate on each lot’s dates?

Every lot has its own dates, so every lot has its own rates. The 125% test has a currency rule of its own. The Form 8621 instructions translate each distribution at the spot rate on the day it is made, unless every distribution in the test is in one foreign currency. Then the test runs in that currency, and each piece of the excess is translated at the spot rate on its own distribution’s date. A yearly average rate fits none of those dates. See PFIC currency translation.

How the PFIC Calculator handles it

The PFIC Calculator & Form 8621 Generator treats each purchase as its own lot. It runs the 125% test per block, with part years annualized, no excess in a block’s first holding year, and an earlier excess distribution counted in the base only to the extent it was included in income that year. It matches sales lot by lot, and when your broker data has no lot detail it says it assumed FIFO. It applies the wash sale rule, carries splits, mergers and other corporate actions through the lots, and translates each transaction at that date’s spot rate. It fills a separate Part V for each block of shares, as the Form 8621 instructions describe, with a loss kept on its own Part V. Where the data runs out, such as shares transferred in with no basis or date, a balance that goes negative, or a distribution on a date with no shares held, it flags the problem instead of guessing. Every figure is in the workpapers.

It computes section 1291 only, not QEF or mark-to-market. It can only use the lot detail your data carries. And it won’t guess a missing rate or price.

When to have a CPA look

If your history has transfers in, gifts, gaps or years of reinvested distributions, the ledger is where the risk sits. The calculator offers an optional CPA review of its own workpapers before you file. It covers what the calculator produced, not a return or forms prepared somewhere else.

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
• 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
• PFIC Currency Translation: Spot Rates, Fund-Currency Math and Pence
• Form 8621 Filing Exceptions: Every One, and Where Each Stops

Glossary

• Block of shares: shares acquired on the same date, which share a holding period and are tested together. Also called a lot.
• Holding period: how long you have held a share, determined under section 1223. Section 1291 spreads a gain or excess distribution over it day by day. See the PFIC excess distribution regime.
• FIFO: first in, first out. The rule that charges a sale to your earliest lot when you didn’t identify the shares sold.
• Adequate identification: naming the lot to your broker at the time of sale and getting written confirmation.
• Average basis method: averaging the cost of identical shares in an account. Treas. Reg. §1.1012-1(e) limits it to regulated investment company shares and qualifying dividend reinvestment plans.
• Part V: the part of Form 8621 for excess distributions and dispositions under section 1291. See what a PFIC is.

Frequently asked questions

Is each PFIC purchase a separate lot?

Yes. Section 1291(b)(3)(A) makes the determination share by share and lets you group only shares with the same holding period. Shares bought on different days are separate blocks, each with its own 125% test and day count.

Are reinvested PFIC dividends separate lots?

Yes. A reinvested cash distribution buys new shares on the day it is reinvested, so they start their own holding period. Monthly reinvestment adds twelve blocks a year.

Does FIFO apply to PFIC shares?

When you didn’t adequately identify the shares you sold, yes. Treas. Reg. §1.1012-1(c) charges the sale to your earliest lot for basis and holding period. Identification means naming the lot to your broker at the time of sale and getting written confirmation.

Can I use average cost for a foreign fund?

Usually not. Treas. Reg. §1.1012-1(e) allows average basis for regulated investment company shares, which must be domestic, and for shares in a qualifying dividend reinvestment plan. Even then, section 1291 still needs each share’s holding period, which an average cost doesn’t show.

Do I need a separate Form 8621 Part V for each lot?

The current form says to complete a separate Part V for each excess distribution and disposition. The instructions add that lines 15a to 15e are completed separately for each block with the same holding period, and line 15f for each block sold.

What if my broker shows shares transferred in with no cost or date?

Find the original purchase records. A move between your own accounts keeps the original cost and date, and a gift can carry the giver’s holding period and distribution history into your 125% test. Until the gap is filled, any figure built on that lot is a guess.

Put every lot on the ledger. Load your full transaction history into the PFIC Calculator and let it match each sale to its lots, flag the gaps and fill a separate Part V for each block of shares.