The Three PFIC Tax Regimes: Section 1291, QEF and Mark-to-Market
For each PFIC you are taxed under one of three regimes. Which one applies depends on the elections you made, and on what the fund and its shares allow. This page explains each one in plain English. The statements come from the IRS Instructions for Form 8621.
| Section 1291 (default) | QEF election | Mark-to-market (section 1296) | |
|---|---|---|---|
| Is it automatic? | Yes. It applies when you made neither of the other two elections. | No. You must elect, usually with a timely filed return (Part II, election A). | No. You must elect (Part II, election C). |
| How you are taxed | No tax on unrealized gains. Excess distributions and gains on sale are spread over your holding period; the earlier years are taxed at the top rate with an interest charge. | You include your share of the fund’s ordinary earnings and net capital gain each year, even if you receive nothing. | You include each year’s gain (value up) as ordinary income; losses are deductible only up to prior inclusions. |
| What you need | Nothing special. Dates, costs, distributions and values. | A PFIC Annual Information Statement from the fund with the numbers to report. Many foreign funds, including most Indian funds, do not provide it. | The stock must be “marketable”: regularly traded on a qualifying exchange, or a fund that meets the special conditions in the regulations. |
| Form 8621 parts | Part V (and Part I) | Parts II and III (and Part I) | Parts II and IV (and Part I) |
Which one fits an Indian mutual fund?
- QEF: usually unavailable, because the fund does not give you the annual statement the election requires.
- Mark-to-market: usually unavailable for an unlisted open-ended scheme, because its units are not regularly traded on a qualifying exchange. An exchange-traded fund may qualify. Whether a particular fund meets the regulation is a fact question.
- Section 1291: therefore the regime most people with Indian mutual funds are in. It is not a choice you made; it is what applies when no election exists.
What happens if you elect later
- If you elect mark-to-market in a year after you already held the stock, without an earlier QEF election, the stock is treated as sold at the end of the year and the gain is taxed under section 1291.
- To keep the option of a QEF election for earlier years, you can file a protective statement if you reasonably believed the company was not a PFIC. It must be filed with the first return it applies to and it extends the time the IRS has to assess those years. The contents are in Treasury Regulations section 1.1295-3(c).
The Part II elections in one line each
| Election | What it is |
|---|---|
| A | Qualified electing fund (QEF) election |
| B | Extension of time to pay tax on undistributed QEF earnings |
| C | Mark-to-market election |
| D | Deemed sale election, made with a QEF election |
| E | Deemed dividend election, made with a QEF election |
| F | Deemed sale election for a former PFIC or a section 1297(e) PFIC |
| G | Deemed dividend election for a section 1297(e) PFIC |
| H | Deemed dividend election for a former PFIC |
Elections have timing rules and tax effects of their own. Do not make one without a review of your facts.
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.