Excess Distributions and the Section 1291 Interest Charge
Under the default section 1291 rules, the extra tax and the interest charge come from an excess distribution, and from a sale (the whole gain on a sale is treated as one). This page walks through the steps with a made-up example. The steps follow the IRS Instructions for Form 8621, Part V.
Step 1. Is there an excess distribution?
- Add up your distributions on the fund for the year (dividends, including dividends reinvested in more units).
- Look at your distributions in the three years before. Take one-third of that total (or divide by the number of prior years, if you held it for fewer than three).
- Multiply by 125%. The part of this year’s distributions that is above that figure is the excess distribution. The rest is taxed like an ordinary dividend.
- In the first year you hold the fund, there is no excess distribution.
Step 2. A sale is treated as one big excess distribution
Gain on a sale, redemption, transfer or pledge of PFIC stock is treated as an excess distribution. A loss is ignored for these rules. Each block of shares with a different holding period needs its own Part V, so monthly SIP purchases are separate lots.
Step 3. Spread it over your holding period
Divide the excess distribution by the number of days you held the stock, and give each year the amount for its days. The amounts for the current year (and for any days before the company was a PFIC for you) are ordinary income. For each earlier PFIC year, the amount is taxed at the highest rate in effect for that year (37% for 2018 through 2025), and foreign tax attributable to the distribution can reduce that tax but not below zero.
Step 4. Add the interest
Interest runs on the extra tax for each earlier year, from the due date of that year’s return to the due date of the return for the year of the sale or distribution. The rate is the IRS underpayment rate, which changes every quarter and compounds daily.
A worked example (made up)
You bought a foreign fund on March 1, 2022 for $20,000, never received a distribution, and sold it on September 15, 2025 for $30,000. You were a U.S. person for the whole time. The gain is $10,000. Holding period: 1,295 days.
| Year | Days held | Share of the $10,000 gain | Treatment | Extra tax at 37% |
|---|---|---|---|---|
| 2022 | 306 | $2,363 | Earlier PFIC year: taxed at 37% plus interest | $874 |
| 2023 | 365 | $2,819 | Earlier PFIC year: taxed at 37% plus interest | $1,043 |
| 2024 | 366 | $2,826 | Earlier PFIC year: taxed at 37% plus interest | $1,046 |
| 2025 | 258 | $1,992 | Current year: ordinary income | |
| Extra tax (Form 8621 line 16e) | $2,963 | |||
- Ordinary income: $1,992 for 2025, reported as other income (Schedule 1, line 8z).
- Extra tax: about $2,963, added on Form 1040 line 16 (box 3, code 1291TAX).
- Interest: about $457 on that tax at the IRS quarterly underpayment rates from the return due dates (April 18, 2023, April 15, 2024 and April 15, 2025) to April 15, 2026, compounded daily; reported on Schedule 2, line 17p. This figure is an illustration only; actual interest depends on exact due dates and rates.
Real calculations also handle many lots, reinvested dividends, currency conversion, the date you became a U.S. person and foreign tax. Ask us to run yours.
General educational information. PFIC treatment, elections and reporting depend on individual facts and change over time. Confirm the rules on irs.gov and consult a qualified professional before filing Form 8621 or making any election. This site is an independent guide and is not affiliated with the IRS.