PFIC Rules and Form 8621 for Foreign Funds

At a glance

If you are a U.S. person holding a foreign fund, check whether it is a PFIC.
A separate Form 8621 is generally required for each PFIC, but specific reporting exceptions may apply. An FBAR does not replace it.
Gather purchase, sale, distribution and value records, plus any prior elections, before choosing a tax method or correcting a missed year.

Many people who move to the United States keep the investments they made at home. A mutual fund bought through a bank app, a money market fund that holds spare cash, an ETF listed in Hong Kong or Shanghai: these are ordinary products where they were bought.

Under U.S. tax law, many of them are passive foreign investment companies, or PFICs. A U.S. person who owns one may have to file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and the income can be taxed under rules that are much less favorable than the rules for a U.S. fund.

The requirement is easy to miss because:

The fund may pay nothing out for years
A foreign institution does not send a Form 1099
The balance may be small
Reporting the account on an FBAR does not take the place of Form 8621

Use this guide to check whether your investment may be a PFIC, when Form 8621 is required, which tax methods may apply and what to review if earlier years were missed.

What is a PFIC?

A foreign corporation is a PFIC for a tax year if it meets either of two tests:

Income test. 75% or more of its gross income is passive income, such as interest, dividends and gains from selling investments.
Asset test. At least 50% of its assets, on average, produce passive income or are held to produce it.

The tests look at what the corporation earns and owns. The IRS does not publish a list of PFICs, and the product name does not decide the answer.

The investment must also be treated as a corporation for U.S. tax purposes. A fund that is legally a trust or a contract-based fund can still be treated as a corporation, so its legal form alone does not settle the question.

Which investments are commonly PFICs?

A fund exists to hold investments, so nearly all of its income and assets are passive. The following commonly meet the tests:

Foreign mutual funds, including funds sold through banks, brokers and payment apps
Foreign money market funds
ETFs organized and listed outside the United States
Foreign holding companies whose assets are mostly cash, securities or other investments and
Some bank wealth-management products and investment-linked insurance policies, depending on their legal structure and what they hold.

The IRS's own Internal Revenue Manual describes foreign mutual funds as the most common PFIC situation.

The following are generally not PFICs:

Bank deposits and individual bonds, which are not stock in a corporation
Shares of a foreign company that runs an active business, as long as it does not meet either test and
U.S. mutual funds and U.S. ETFs that invest in foreign markets, because the fund itself is a U.S. entity.

An early-stage foreign company deserves a second look. A startup that holds mostly cash and has little revenue can meet the asset test even though it plans to run a business.

Who has to file Form 8621?

Form 8621 applies to a U.S. person who owns PFIC stock directly or indirectly. A U.S. person generally includes:

A U.S. citizen
A U.S. resident alien for tax purposes, including a green card holder and
A domestic corporation, partnership, trust or estate.

Visa type alone does not decide the answer. An F-1, H-1B or L-1 holder's obligation depends on whether that person was a U.S. tax resident during the year. A nonresident alien is not subject to these rules.

Ownership can be indirect. A U.S. person is generally treated as owning PFIC stock held through:

A foreign corporation that is not a PFIC, when the person owns 50% or more of it
Another PFIC or
A partnership, S corporation, trust or estate.

When is Form 8621 required?

The IRS instructions list five situations. A U.S. shareholder files Form 8621 for a tax year when the shareholder:

Receives certain direct or indirect distributions from a PFIC;
Recognizes gain on a direct or indirect disposition of PFIC stock;
Is reporting information for a QEF or mark-to-market election;
Is making an election in Part II of the form; or
Is required to file an annual report under Section 1298(f).

The fifth item is the one people overlook. It requires an annual report in Part I for each PFIC, even in a year with no sale, no distribution and no election, unless an exception applies.

A separate Form 8621 is required for each PFIC. Someone who holds six foreign funds generally files six forms. Spouses filing jointly may use one form for a PFIC in which both own an interest.

What if I bought the fund before moving to the United States?

The filing requirement starts once the owner becomes a U.S. person. It does not matter that the fund was bought years earlier with foreign earnings.

The earlier period still matters for the tax calculation. Under Treasury Regulations section 1.1291-9(j)(1), a corporation is not treated as a PFIC for the days in the holding period before the shareholder became a U.S. person. Gain allocated to those days is taxed as ordinary income in the year of sale, without the additional interest charge described below.

This is one reason foreign funds are worth reviewing before U.S. tax residency begins, while more options are still available.

When is Form 8621 not required?

The regulations provide several exceptions to the annual report in Part I. The most common are below.

The $25,000 exception

A shareholder does not have to file the annual report for a PFIC taxed under the default rules when all of the following are true:

The total value of all PFIC stock the shareholder owns is $25,000 or less on the last day of the tax year, or $50,000 or less on a joint return
The shareholder received no excess distribution from that PFIC during the year
The shareholder recognized no gain on a sale or other disposition of that PFIC and
No QEF election is in effect for that PFIC.

The $25,000 test adds together every PFIC the shareholder owns, including PFICs with a QEF or mark-to-market election. It leaves out PFIC stock owned through another U.S. person or through another PFIC.

PFIC stock owned only through another PFIC has its own limit. The annual report is not required for that lower-tier PFIC when the shareholder's share is worth $5,000 or less, with the same conditions on distributions and sales.

Example 1: Small holdings and a quiet year

A single taxpayer owns two foreign mutual funds worth $18,000 in total on December 31. During the year there was no sale, no distribution and no election.

The total is under $25,000, so the annual report is generally not required for either fund.

Example 2: Small holdings, but one fund was sold

The same taxpayer sells one of the two funds during the year at a $900 gain.

The exception no longer applies to the fund that was sold. Form 8621 is required for that fund, and the gain is taxed under the PFIC rules. The fund that was kept can still qualify.

Example 3: A married couple over the limit

A couple filing jointly owns four foreign funds worth $62,000 in total on December 31. Nothing was sold and nothing was paid out.

The total exceeds $50,000, so the annual report is generally required for each of the four funds.

Other exceptions

Tax-exempt accounts. A person who owns PFIC stock through an IRA, a qualified retirement plan such as a 401(k), a 403(b) or 457(b) plan, a 529 or Coverdell account, or an ABLE account is not treated as a PFIC shareholder.
Short-term holdings. The annual report is not required for stock acquired during the tax year or the year before, held for 30 days or less in total, with no excess distribution and no gain.
Another U.S. person already reports. When the stock is held through a U.S. partnership or S corporation that files Form 8621, the owner generally files only if the entity fails to file or the owner must recognize income under the default rules.
Foreign nongrantor trusts and foreign estates. A U.S. beneficiary generally does not file the annual report unless the beneficiary made an election, received an excess distribution or recognized gain.
Treaty dual residents. A person treated as a nonresident under a tax treaty is generally exempt for that period when the required return and Form 8833 are filed on time.
Treaty pension arrangements. Some foreign pension funds covered by a U.S. income tax treaty are exempt. The answer depends on the specific treaty.
Controlled foreign corporations. A 10% U.S. shareholder who already includes the corporation's Subpart F income is generally not subject to the PFIC rules for the same stock during that period.

The small-value and short-holding exceptions remove an annual reporting requirement; they do not exempt distributions or gains from tax. The other exceptions have their own conditions and may affect whether the PFIC rules apply. A year with a dividend also needs a closer look, even when the dividend was automatically reinvested.

How is a PFIC taxed?

A PFIC is taxed under one of three methods. The default method applies automatically. The other two are elections the shareholder makes on Form 8621.

	Default rules (Section 1291)	QEF election (Section 1295)	Mark-to-market election (Section 1296)
Who can use it	Applies when no election is made	Shareholders whose fund provides a PFIC Annual Information Statement	Shareholders of marketable stock
Tax while holding	None until a distribution or sale	Each year, on the shareholder's share of the fund's earnings	Each year, on the increase in value
Type of income	Ordinary income, plus tax at the highest rate and interest for earlier years	Ordinary income and long-term capital gain	Ordinary income
Losses	Do not offset Section 1291 gains; a sale loss may be recognized under other tax rules	Fund losses do not pass through; a sale loss depends on adjusted basis and the applicable loss rules	Annual ordinary loss is limited to prior inclusions not already offset by allowed losses

The default method: Section 1291

With no election, the PFIC is a "Section 1291 fund." Nothing is taxed while the shareholder simply holds it. The cost arrives when there is an excess distribution or a sale.

An excess distribution is the part of the current year's distributions that exceeds 125% of the average distributions of the three preceding years. A distribution in the first year of ownership is not an excess distribution.
All gain on a sale is treated as an excess distribution. A pledge of the stock as security for a loan counts as a disposition.
The excess distribution is spread evenly over every day the shareholder held the stock.
The part allocated to the current year, and to years before the corporation was a PFIC, is ordinary income.
The part allocated to earlier PFIC years is taxed at the highest tax rate in effect for each of those years, and interest is charged as if the tax had been due back then.

Dividends from a PFIC are also not qualified dividends, so they do not receive the lower rates that apply to long-term capital gains.

Example 4: Selling a fund under the default method

A taxpayer bought a foreign fund at the start of 2021 for $50,000 and sold it at the end of 2025 for $80,000. No election was made.

The $30,000 gain is spread over five years, about $6,000 per year.

The 2025 share, about $6,000, is ordinary income taxed at the taxpayer's own rate.
The 2021 through 2024 share, about $24,000, is taxed at 37%, the highest individual rate for those years. That tax is about $8,880.
Interest is then added on each earlier year's tax.

For comparison, a $30,000 long-term capital gain taxed at 15% would produce $4,500 of tax.

The QEF election: Section 1295

A shareholder who makes a qualified electing fund election reports a share of the fund's results every year:

The share of ordinary earnings is ordinary income
The share of net capital gain is long-term capital gain and
Both are taxed whether or not the fund pays anything out.

Amounts included in income increase the shareholder's basis, and later distributions of those amounts are not taxed again.

The election depends on the fund. Each year the fund must give the shareholder a PFIC Annual Information Statement. Funds marketed to local retail investors often do not issue one, so it is worth asking the fund company before relying on this method.

The election is generally due by the extended due date of the return for the first year it applies. When it is made after the first year of ownership, the earlier years stay under Section 1291 unless the shareholder also makes a purging election, which taxes the built-in gain at that point.

The mark-to-market election: Section 1296

This election is available only for marketable stock. That generally means stock regularly traded on a U.S. exchange registered with the SEC, or on a foreign exchange that is supervised by a government authority and meets the requirements in the regulations. "Regularly traded" means traded, in more than minimal quantities, on at least 15 days in each calendar quarter.

An open-end foreign fund can also qualify when it meets a detailed list of conditions in Treasury Regulations section 1.1296-2(d), such as public availability, redemption at net asset value and regulation as an investment company.

Under the election:

Each year, the increase in value over the shareholder's adjusted basis is ordinary income
A decrease in value is deductible as an ordinary loss, limited to earlier mark-to-market income inclusions that have not already been offset by allowed losses and
Gain on a sale is ordinary income.

The election is due by the extended due date of the return for the year it starts, and it continues until it is revoked or terminated. When it is made after the first year of ownership, the first year's mark-to-market gain is taxed under Section 1291.

Which method fits?

The answer depends on the facts, but a few patterns are common:

A listed ETF or stock bought recently may be a candidate for a mark-to-market election, ideally starting in the first year of ownership.
A fund that provides the annual statement may be a candidate for a QEF election, which keeps long-term capital gain treatment.
A fund that offers neither stays under the default method. In that case the timing of a sale deserves a calculation before the sale happens.

An election made late does not erase the earlier years. That is why the choice is best made in the first year a fund is owned or the first year of U.S. tax residency.

How is Form 8621 filed?

Form 8621 is attached to the shareholder's income tax return and is due on the return's due date, including extensions. A person who is not required to file a return for the year mails the form to:

Internal Revenue Service Center
Ogden, UT 84201-0201

A few practical points:

One form per PFIC. Each fund gets its own Form 8621.
Reference ID number. Most foreign funds have no U.S. employer identification number. The filer assigns a reference ID of up to 50 letters and numbers, with no spaces or special characters, and uses the same one every year.
Part I. The annual report asks for the share class, the date shares were acquired during the year, the number of shares at year-end and their value. A year-end account statement can generally be used for the value.
Currency. The December 2025 revision adds a three-letter currency code and a U.S. dollar amount in Part V.

Do the FBAR and Form 8938 cover the same fund?

They are three separate requirements with different thresholds, and one does not replace another.

Form	What it reports	When it applies	Where it goes
Form 8621	Each PFIC, one form per fund	The rules described in this article	With the income tax return
Form 8938	Specified foreign financial assets	For a single filer living in the U.S., more than $50,000 at year-end or more than $75,000 at any time during the year. Higher amounts apply to joint filers and to people living abroad	With the income tax return
FBAR (FinCEN Form 114)	Foreign financial accounts, including an account with a mutual fund or similar pooled fund	Combined value of all foreign accounts over $10,000 at any time during the year	Filed electronically with FinCEN, separately from the tax return

A PFIC reported on a timely filed Form 8621 does not have to be listed again in detail on Form 8938. The filer instead enters the number of Forms 8621 in Part IV of Form 8938. For an individual, the value of that PFIC still counts toward the Form 8938 threshold.

What happens if Form 8621 was missed?

The Internal Revenue Code does not set a fixed dollar penalty specifically for a missing Form 8621. That does not make the form optional.

The return stays open. Under Section 6501(c)(8), when a required Form 8621 is not filed, the period for the IRS to assess tax does not end until three years after the information is provided. Without reasonable cause, this applies to the whole return and not only to the PFIC items.
Unreported income is still taxable. A sale or distribution that was left off the return, or reported as ordinary capital gain, can lead to additional tax, interest and penalties on the underpayment.
Elections have deadlines. Each year that passes without a QEF or mark-to-market election is another year under the default method.

How can missed years be corrected?

The right approach depends on what was missed.

Only the form was missed. Under the IRS's delinquent international information return procedures, a taxpayer who is not under examination or investigation, and has not been contacted about the missing returns, files through the normal process. Late information returns other than Forms 3520 and 3520-A are attached to an amended income tax return. A reasonable cause statement may be attached.
Income was also missed. When foreign income went unreported and the conduct was not willful, the Streamlined Filing Compliance Procedures may apply. They generally cover the most recent three years of returns and six years of FBARs. See our articles on SDOP for U.S. residents and SFOP for taxpayers living abroad.

Neither route guarantees a result, and the choice between them should be made on the full facts before anything is filed.

Common mistakes with PFICs and Form 8621

Common problems include:

Assuming a fund is not reportable because it paid nothing out
Treating an automatically reinvested dividend as if no distribution occurred
Reporting the sale of a foreign fund on Schedule D as an ordinary capital gain
Reporting PFIC dividends as qualified dividends
Assuming the FBAR or Form 8938 already covers the fund
Applying the $25,000 exception without adding all funds together, or in a year with a sale
Filing one Form 8621 for several funds
Changing a fund's reference ID number from year to year
Making a QEF election without the fund's annual statement
Making a late election without addressing the earlier years and
Overlooking funds held through a foreign holding company or another fund.

Final thoughts

A foreign fund can be an ordinary investment and still carry U.S. reporting and tax rules that its owner never expected.

For any foreign investment, the most useful questions are:

Is it a foreign corporation that meets the income test or the asset test?
Was the owner a U.S. person during the year?
Is it held directly, indirectly or through a tax-exempt account?
What was the total year-end value of all PFICs?
Were there any distributions or sales during the year?
Is a QEF or mark-to-market election available, and was it made on time?
Are an FBAR and Form 8938 also required?
Were earlier years missed?

The earlier these questions are asked, the more options remain. The first year of ownership, or the first year of U.S. tax residency, is usually the best time to ask them.

Own a foreign fund? What to know about PFIC rules and Form 8621