PFIC bought and sold in the same year – mark-to-market
In Part 1 of this series, I showed you what happens when you buy and sell a PFIC in a year. Part 1 dealt with the default treatment of the PFIC sale under the excess distribution rules. The bottom line? All of the gain is ordinary income, is reported on Form 8621 and then flows through to Form 1040, Line 21.
In this post, I compare the outcome if you make a mark-to-market election for the PFIC, instead of allowing the default excess distribution rules to apply.
Facts
Again, here are the facts we are working with. A taxpayer buys shares of a PFIC for US$1,000 and sells them in the same calendar year for US$1,500. How is the US$500 gain taxed? How is it reported on a tax return? To keep this example simple, let’s pretend that there are no distributions or dividends from this PFIC. It is a simple buy low, sell high transaction.Taxation under the mark-to-market regime
Remember there are three different ways in which PFICs are taxed. The excess distribution rules I explained in Part 1 give you the default tax treatment. But you aren’t stuck with the excess distribution rules. You can elect “mark-to-market” treatment. Again, let’s remember the Source of Infinite Wisdom: the Internal Revenue Code. In this case, Section 1296 of the Internal Revenue Code gives us everything we need to know about the mark-to-market rules for PFICs. The simple idea is that you have a starting point for your investment in the PFIC. At the end of the year, you look at the value of the PFIC. If it went up, you have ordinary income. Make some changes to the starting point value for your PFIC (called “adjusted basis”) and do the same thing at the end of next year. Section 1296(a)(1) says:If the fair market value of such stock as of the close of such taxable year exceeds its adjusted basis, such United States person shall include in gross income for such taxable year an amount equal to the amount of such excess.If you sell the PFIC before year-end, you use the sale price to calculate gain under the mark-to-market rules.
1296 states that the first year of MTM election is treated under 1291, which assesses the income over the investor’s holding period (such as if less than 1 year).
@Sunil, I am on vacation this week. I will blog about this sometime when I get back.
Phil — what about dividends/distributions ? Are they added in Form 8621, then become ordinary income, or do they go on Schedule B ? In one way it doesn’t matter as they are all taxed at same rate, but what is the right way to do it ?
I have honestly tried to understand FAQ 29 and section 1296 but I don’t seem to be able to figure out the carrying forward and backward of losses. In plain terms, if you have a loss in year ’06, ’07, ’08 and gains in ’09 and ’10, can you offset those gains in the latter years with the ones in the former?
Can you only do the offsetting within a given PFIC? Or can you not do this at all?
Thanks for any illuminating tips.
Should dividend be reported in Schedule B when one uses MTM for taxation?
Phil
Thanks for the info. Looking forward to more posts 🙂
Mark,
The way I’m approaching the PFIC topic is to start simple — with a disposition where the taxpayer buys and sells in a single calendar year. Once I have beaten that topic to death 🙂 I will move on to dividends and distributions. It’s on the list of topics. In fact, dividends and distributions will be next.
Phil.
Phil — what about dividends/distributions ? Are they added in Form 8621, then become ordinary income, or do they go on Schedule B ? In one way it doesn’t matter as they are all taxed at same rate, but what is the right way to do it ?
Deborah,
The PFIC stuff is one of those topics you “know” off the top of your head but it takes a metric ton of work to wade through the Code and REALLY get the right answer.
I’m going to wade through the Code now and figure out what’s going on with the stuff you mentioned in your comment. You may be right. And I appreciate your comment and question. I like the fact that the interwebs are a great big mastermind and quality control system. 🙂
Phil.
I’m still not sure about this. The way it reads, part III of F8621 only appears to report unrealized gain or loss.
In this example, the taxpayer does not have any PFIC stock left at the end of the year. So wouldn’t the FMV and cost basis both be zero?
Are you saying that realized and unrealized gains and losses are reported in the same way on Form 8621? What if the result in your example had been a loss?