This is Part 4 of a focused guide on PFICs, Form 8621, and U.S. tax traps for global investors.
Part 1 . Part 2. Part 3 . Part 4 . Part 5 . Part 6 . Part 7 . Part 8
If this applies to you or someone you know - subscribe to get the rest of the series - before the IRS catches up.
Overview
If you’ve figured out that you own a PFIC, the next question is: Can you avoid the brutal default tax regime?
The answer is yes—if you act early. The IRS allows you to choose between two alternate tax treatments: the Mark-to-Market (MTM) election or the Qualified Electing Fund (QEF) election. But the window to make these elections is narrow and forward-looking.
This article explains how each election works, when you can make them, and how they compare.
Option 1: Mark-to-Market (MTM) Election
What it is: You report and pay tax on the fund’s gains every year, as if you sold and repurchased it at the end of each year.
Who can use it: Only if your PFIC is “marketable”—i.e., regularly traded on a qualified stock exchange.
How it’s taxed:
Annual gains = ordinary income (not capital gains)
Annual losses = deductible only against prior MTM PFIC gains
No lookback interest or default regime if this is elected in time
When to elect: With a timely-filed tax return (plus Form 8621) in the first year of U.S. tax residency or the first year you identify the PFIC.
Pros:
Avoids lookback and interest penalties
Simpler than QEF in practice
Cons:
All gains taxed at ordinary income rates
Can’t retroactively apply MTM for past years
Losses are limited in usefulness
Option 2: Qualified Electing Fund (QEF) Election
What it is: You treat the PFIC like a U.S. mutual fund—reporting your share of income and capital gains each year, even if you don’t sell.
Who can use it: Only if the foreign fund provides a detailed annual QEF statement (rare for most ETFs and retail mutual funds).
How it’s taxed:
Income = ordinary income
Capital gains = taxed at long-term rates if held long enough
When to elect: Same as MTM—must be made proactively with Form 8621.
Pros:
Potentially favorable long-term capital gains treatment
Most accurate reflection of annual income
Cons:
Almost no foreign funds issue QEF statements
Complicated tracking and reporting
Requires deep cooperation from the fund manager
Can You Make Both Elections?
No, but you can start with QEF and switch to MTM later if QEF becomes unworkable. You can’t go the other way.
Why Timing Matters
These elections are not retroactive. If you trigger a tax event (e.g., sell the PFIC or receive a large dividend) before electing, you’re stuck with the default regime.
Even if you just discovered your PFIC, you can only fix things going forward.
Filing Form 8621 correctly and on time is critical.
This is Part 4 of a focused guide on PFICs, Form 8621, and U.S. tax traps for global investors.
Part 1 . Part 2. Part 3 . Part 4 . Part 5 . Part 6 . Part 7 . Part 8
If this applies to you or someone you know - subscribe to get the rest of the series - before the IRS catches up.