A US holder with shares in a Passive Foreign Investment Company (PFIC) will likely realize that there can be negative tax implications for being a holder of a PFIC. Luckily, these consequences can be avoided in two ways: by either making a Qualified Electing Fund (QEF) election or by making a mark-to-market election. This article will provide a general understanding of how to make a mark-to-market election, as well as some of the effects that these elections can have.

PFIC – Mark-to-Market Election

Who can make a mark-to-market election?

A US holder of a PFIC can make a mark-to-market election if the stock is considered “marketable stock.” Holders cannot make a mark-to-market election the first year that the holder holds stock in the PFIC. To know if a holder is eligible to make a mark-to-market election, it is important to understand what marketable stock is.

What is “marketable stock”?

 There are three main ways in which stock can be considered marketable:

1. Stock can be considered marketable if the stock is regularly traded on a national securities exchange registered with the Securities and Exchange Commission (SEC).
2. Stock is considered marketable if the stock is regularly traded on the national market system (e.g. the New York Stock Exchange).
3. Stock is considered marketable if the stock is regularly traded on a foreign securities exchange regulated by the governmental authority of the country the market is in and meets certain criteria.

Stock is considered to be regularly traded if in a given year, the stock is traded on a minimum of 15 days during the year. There are also other criteria for stock of a PFIC to be considered marketable that do not fall within the three main ways. Contact us today for a consultation if you want to find out if the stock you have in a PFIC is marketable stock or if you want any additional information.

How does a shareholder make a mark-to-market election?

 Similar to the QEF election, a holder looking to make a mark-to-market election has to do so on or before the income tax due date for the year the holder marks to market the stock. This is typically done via Form 8621.

 What are the effects of making a mark-to-market election?

Making a mark-to-market election can come with great benefit to a holder of a PFIC. If a holder makes this election, then capital losses can actually be taxed as ordinary losses. Since ordinary losses are deductible, this lowers the amount owed in taxes for the holder.

Takeaways

Being a holder of a PFIC can have negative consequences. To ensure the holder is not impacted by these consequences, the holder should look into eligibility for either a QEF election or a mark-to-market election.

There is a lot of complicated information to process if you are a shareholder of a PFIC. Contact us today for a consultation if you would like to know if you are eligible to make QEF election or a mark-to-market election, or if you want any additional information.