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  1. @Frank if you have made a MTM election, that’s correct, you increase your basis each time you include a MTM gain in income. Then when you sell, your taxable gain is the difference between the proceeds of the sale and your adjusted basis (which would have been increased over the year for all the MTM gains previously recognized, and decreased over the years for all the MTM losses previously recognized). But if you don’t have the MTM election in place, and you are operating under the rules of Section 1291, then you are not recognizing mark to market gains each year, not increasing your basis for those gains each year, and you are subject to the excess distribution rules I describe above on the full gain.

  2. @DS, all of these are good points. Thank you for adding these to the topic. It is tough to be comprehensive on such a complex topic!

  3. Thanks for the detailed explanation. One other question that wasn’t clear. Let’s say in the example that a fund was purchased in 2012 and sold in 2014. I get the “prior years PFIC period” but what isn’t clear is how you account for tax paid if you filed 8621 in (e.g., 2013). I’m assuming that the fact I filed a 2013 form and (e.g.) mark-to-market election for this fund would increase my basis. That is, on selling the share the “gain” I must account for is only the increase in capital gain from 2013-2014, not the entire period.

    Otherwise we would be taxed twice on the gain? The thing that is still unclear is that the prior years are taxed at marginal tax level (say 30%) while the sale is supposed to allocate things according the maximum bracket (39.5%).

  4. Good explanation. In reality (as you’ve acknowledged) it’s more complicated in that it would be rare to buy on Jan. 1 and sell on Dec. 31, so (as you’ve pointed out) the gain each year is allocated as the number of days the fund was held during that year, divided by the total number of days it was held.
    Also, the tax must be calculated for each lot with a different hholding period (if you buy shares and sell some on one date and the rest on another date, you have two lots.)
    Should you have a loss on one of the lots, it does NOT offset gains on other lots as far as PFIC tax is concerned; PFIC losses are treated the same way as any other capital losses.
    Finally, all these calculations require you to create a spreadsheet (for each lot) and you must attach a copy showing the calculations to your return. To put it another way, there does not exist an IRS form for calculationg PFIC gains.

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