This is Part 5 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
Many global professionals in the U.S. discover PFICs not because they bought them directly—but because they inherited them or moved to the U.S. while already owning them. Unfortunately, the IRS still applies PFIC rules in full force.
This article explains what happens if you inherit a PFIC, move to the U.S. with one, or gift one to someone else—and what tax traps to watch for.
Scenario 1: You Inherit a Foreign Mutual Fund or ETF
PFIC status does not go away just because you inherited the investment.
The IRS applies PFIC rules starting from the date you inherited it, assuming you were a U.S. tax resident at the time.
You must:
Determine the fair market value at inheritance (this becomes your cost basis)
Begin PFIC tracking (including Form 8621) from that date forward
Gotcha: If you don’t know it’s a PFIC and later sell or receive dividends, you’ll fall into the default regime (Section 1291) with back taxes and interest from the inheritance date.
Scenario 2: You Bought the PFIC Before Moving to the U.S.
This is common: you invested in a foreign fund while living abroad, then later became a U.S. tax resident.
PFIC rules start applying the day you become a U.S. resident for tax purposes (not the date you bought the fund)
Your holding period for PFIC purposes starts on your residency start date
Any gains from that point forward are subject to PFIC treatment
Important: You don’t pay U.S. tax on appreciation before becoming a resident—but you still need to track the full timeline for reporting purposes.
Scenario 3: You Gave or Received a PFIC as a Gift
Giving or receiving a PFIC doesn’t avoid the problem—it shifts it.
If you gift a PFIC while alive, the recipient inherits your holding period and the PFIC treatment continues
If you die and pass a PFIC to an heir, it gets a step-up in basis, but PFIC rules still apply going forward
If the recipient is a U.S. tax resident, they are now responsible for:
Filing Form 8621 annually
Making (or missing) elections
Being taxed under Section 1291 if no action is taken
Special Note on Foreign Retirement Accounts
Some foreign retirement accounts hold PFICs (e.g., NPS in India, pension mutual funds). These may:
Trigger PFIC reporting even if you don’t actively manage them
Complicate treaty treatment or IRS deferral recognition
Always disclose these to a CPA familiar with both international tax and PFIC rules.
What You Should Do
✅ List all foreign funds you own, whether inherited, bought pre-move, or gifted
✅ Note when you became a U.S. tax resident
✅ Check if Form 8621 has ever been filed
✅ Talk to a CPA before selling or withdrawing anything from these funds
✅ Consider elections (MTM, QEF) if you’re still eligible to make them
This is Part 5 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.