PFIC Tax Impact Calculator

Foreign mutual funds and ETFs are PFICs (Passive Foreign Investment Companies) under US tax law. Without a formal election, the §1291 "excess distribution" rules apply when you sell — adding a compounding interest charge on top of ordinary income tax rates. This calculator shows what that costs and how the three PFIC election regimes compare.

How each scenario works

§1291 Default — no election (the trap)

When you sell a PFIC without a prior election, all gain is an "excess distribution." The IRS allocates it ratably over your entire holding period, taxes each year's portion at the highest ordinary income rate for that year — currently 37% — then adds an interest charge at the §6621 underpayment rate (7% Q1 2026) from the due date of the return for each prior year to the sale date. This compounds year over year. A 10-year hold at the 37% bracket produces an effective rate above 50% on the gain. A 15-year hold approaches 62%. The longer you hold, the worse the math gets.

The §1291 interest charge is not deductible. It's computed per-year, per-layer, added to the tax — making it uniquely punishing among US tax regimes.

Mark-to-Market Election (§1296)

If the PFIC is a "marketable security" (stock traded on a qualifying foreign exchange), you can elect MTM. Each year you include any appreciation as ordinary income and deduct any depreciation (limited to prior inclusions). On sale, there's no §1291 excess distribution or interest charge. The downside: all appreciation is taxed at ordinary income rates — you never get LTCG treatment. MTM is better than §1291 default for long holds but still worse than holding a US-domiciled fund taxed at 23.8%.

QEF Election (§1295) — the best-case you rarely get

The QEF election treats the PFIC as a pass-through: each year you include your share of the fund's ordinary income and net capital gain at the applicable rates. On final sale, basis is stepped up — no double-taxation. In the best case (fund is all equities, all growth) you get LTCG treatment matching a US-domiciled ETF. The catch: the fund must provide a PFIC Annual Information Statement each year. Irish-domiciled UCITS (Vanguard Europe, iShares UCITS, etc.) don't provide these. Most foreign mutual funds don't. Without the statement, QEF election is unavailable. This is why most expats who unknowingly hold foreign funds end up in §1291 default.

US-Domiciled ETF — the solution

A US-domiciled ETF (Vanguard VT, VXUS, iShares IEFA, etc.) is not a PFIC. Long-term gains are taxed at LTCG rates (20%) plus NIIT (3.8%) = 23.8% for high-income investors. No Form 8621, no elections, no interest charges. US-listed ETFs that invest globally provide broad international exposure without the PFIC trap. A specialist advisor can help you swap your existing foreign-fund positions into PFIC-free equivalents — and model the cost of selling now vs. continuing to accrue §1291 interest.

How to get out of a PFIC position

If you're already holding foreign mutual funds, your options depend on the specific fund and how long you've held it:

• Sell and reinvest in US-domiciled equivalents. Take the §1291 hit now (less painful if the holding period is short), then move into US ETFs. Often the correct answer for short holds where the interest charge is still manageable.
• Make an MTM election going forward. Stops future §1291 accumulation on new appreciation. You'll owe ordinary income on this year's appreciation as a "catch-up" mark, but future years are MTM. Available only for marketable PFICs (exchange-traded foreign securities).
• Purging election (§1298(b)(1)). A deemed sale at FMV — you pay the §1291 tax once to reset basis. Rarely beneficial unless you expect very long future hold.
• Do nothing if inside a UK ISA or SIPP. ISA and SIPP wrappers don't shield US citizens from PFIC rules. The funds inside are still PFICs. A specialist advisor must analyze the entire picture before recommending any action on SIPP/ISA positions — the §402(b) UK pension treatment interacts with PFIC rules in non-obvious ways.

What this calculator doesn't model

This is a simplified educational tool. It doesn't account for: state income taxes (California and New York have high rates and don't recognize FEIE); the actual historical §6621 rate fluctuations across your holding period; foreign tax credit offsets against §1291 tax; AMT interaction; the timing advantage of MTM (paying annually avoids the compounding interest regardless of bracket); QEF with split ordinary/LTCG income proportions; or basis adjustments from prior QEF/MTM elections. Real decisions require a specialist who handles expat PFIC situations daily — the interaction of these rules is genuinely complex.

Sources

1. IRC §1291 — Excess Distributions from Passive Foreign Investment Companies
2. IRC §1295 — Qualified Electing Fund (QEF Election)
3. IRC §1296 — Mark-to-Market Election for Marketable Stock
4. IRS IRB 2026-08 — §6621 underpayment rate 7% Q1 2026, 6% Q2 2026
5. IRS 2026 inflation adjustments — top ordinary income rate 37% per Rev. Proc. 2025-67
6. IRS Topic 409 — Capital Gains; 20% top LTCG rate
7. IRS Topic 559 — Net Investment Income Tax 3.8%

Tax values verified April 2026. This calculator is for educational purposes only and does not constitute tax or financial advice. PFIC situations require specialist review — elections, holding-period allocations, and foreign-tax-credit interactions vary significantly by situation.