A Comprehensive Guide to Form 8621

Foreign investments can open the door to global opportunities,but they also come with complex tax obligations. For U.S. taxpayers, one of the most overlooked yet critical filing requirements is Form 8621, used to report ownership in Passive Foreign Investment Companies (PFICs).

Many investors are surprised to learn that holding shares in a foreign mutual fund,even through a standard brokerage account,can trigger PFIC rules. Without the right filings and elections, these investments can be taxed at the highest rates, with added interest charges and reporting headaches. Form 8621 is the key component to avoiding costly penalties, gaining control over how foreign investments are taxed, and staying fully compliant with IRS regulations. Knowing how to handle PFICs can make the difference between an efficient tax strategy and an expensive mistake.

What Is Form 8621 and Why It Matters

Form 8621 is officially titled "Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund." It must be filed by U.S. persons who own shares in a PFIC and meet certain reporting triggers.

What Is a PFIC?

A Passive Foreign Investment Company (PFIC) is a foreign corporation that meets at least one of two key criteria. The Income Test states that if 75% or more of the company’s gross income is passive such as dividends, interest, or rents, it qualifies as a PFIC. The Asset Test requires that at least 50% of the company’s assets are used to produce or are held for the purpose of generating passive income. Many foreign mutual funds, certain exchange-traded funds (ETFs), and offshore pooled investments may qualify as PFICs, often without the investor being aware of it.

Why Form 8621 Is Critical

• Avoid Default PFIC Tax Treatment: Without timely filing and elections, PFIC gains are taxed harshly under Section 1291.
• IRS Requirement: Form 8621 must be filed even if no income was received.
• Complex Tax Calculations: Distributions and capital gains must follow PFIC-specific rules unless elections are made.
• No De Minimis Exception: There is no lower limit for investment value any interest in a PFIC may trigger the form.

In short, Form 8621 plays a crucial role in protecting you from punitive taxes and ensuring full IRS compliance with foreign asset disclosure rules.

Who Needs to File Form 8621

Understanding whether Form 8621 applies to your situation is the first step toward proper compliance with U.S. international tax rules. This form is required for any U.S. person,including individuals, corporations, partnerships, trusts, or estates,who owns shares in a Passive Foreign Investment Company (PFIC) and meets specific reporting triggers.

Common Filing Triggers

You are generally required to file Form 8621 if you meet any of the following conditions during the tax year:

• Received a Distribution from a PFIC: Any dividend or payout from a PFIC investment, whether in cash or reinvested, must be reported,even if it seems minor. Distributions are subject to unique PFIC tax rules and require proper documentation.
• Recognized a Gain from Disposing of PFIC Stock: Selling or exchanging PFIC shares triggers recognition of gain, which must be calculated and reported under special rules,even if the transaction took place within a foreign brokerage account.
• Made a Qualified Electing Fund (QEF) Election: If you've chosen to treat the PFIC as a QEF,electing to report your share of the company's earnings annually,you are required to file Form 8621 each year, regardless of whether any actual distributions occurred.
• Made or Revoked a Mark-to-Market (MTM) Election: If you elected to treat publicly traded PFIC stock under the mark-to-market method (or if you're revoking that election), this must be declared on Form 8621. The election affects how income and gains are reported each year.
• Reporting Deferred Tax or Gains under Section 1291: If you previously deferred tax on PFIC income under the default Section 1291 rules, you must continue to file Form 8621 to report interest charges and gains, even in years when no transactions occurred.
• Annual Reporting as a Shareholder of a PFIC: Even without any distributions or gains, owning shares in a PFIC,directly or indirectly through another foreign entity,can require annual filing. The IRS expects consistent reporting of these holdings for transparency and compliance.

Important Note

A separate Form 8621 must be filed for each PFIC investment owned. For example, if you own shares in three different PFICs, you must file three separate forms,one for each entity. However, if the total value of PFIC holdings is less than $25,000 ($50,000 for joint filers), taxpayers may be exempt from filing Form 8621, unless an election is made. If the value of a shareholder’s indirect PFIC stock is $5,000 or less on the last day of the tax year and the shareholder does not receive an excess distribution from or recognize gain on the sale or disposition of the PFIC stock, they are not required to complete Part I of Form 8621.

Understanding PFIC Taxation: The Three Methods

How PFICs are taxed depends on whether the shareholder makes an election. Without an election, the IRS applies default rules under Section 1291 that often result in higher taxes and interest charges. By making a timely election,either as a Qualified Electing Fund (QEF) or under the Mark-to-Market (MTM) method,you may reduce your tax burden and simplify future reporting. Each method has different requirements and implications based on your investment type and goals.

• Section 1291 Fund (Default Method): If no election is made, PFICs are taxed as Section 1291 funds. Distributions and gains are split into “excess distributions,” taxed at the highest applicable rate for each year held, with additional interest charges. This can significantly increase tax owed.
• Qualified Electing Fund (QEF) Election: The QEF election allows shareholders to report their share of the PFIC’s income and gains annually, similar to U.S. mutual funds. This avoids deferred tax and interest charges but requires the PFIC to provide an Annual Information Statement. The election must be made in the first year of ownership.
• Mark-to-Market (MTM) Election: Available for publicly traded PFICs, this election treats shares as sold and repurchased at year-end. Unrealized gains are taxed annually as ordinary income. Losses are limited to prior MTM gains. This method avoids interest charges and simplifies reporting but can result in higher annual taxes.

Breakdown of Form 8621 Sections

Form 8621 is divided into multiple parts, each designed to capture different aspects of PFIC ownership, elections, and tax reporting. Completing each section accurately is critical to staying compliant with IRS regulations. Here’s a detailed explanation of what each part covers and when it applies:

Part I – Shareholder and PFIC Identification

This section collects essential identifying information:

• Shareholder’s name, taxpayer identification number, and address
• PFIC’s name, address, and employer identification number (EIN), if available
• Date of acquisition, number of shares owned, and whether the investment is direct or indirect

Part II – Section 1291 Tax Calculations

Required if no QEF or MTM election has been made, this section applies the default PFIC rules:

• Identifies “excess distributions” (disproportionate payouts or gains)
• Reallocates gains over the holding period
• Calculates tax at the highest applicable rate for each year
• Applies interest on deferred taxes

Part III – Elections

This is the control center for selecting how your PFIC is taxed:

• Checkboxes to make or revoke:
• Qualified Electing Fund (QEF) election
• Mark-to-Market (MTM) election
• Deemed Sale or Deemed Dividend elections

Part IV – Income from a Qualified Electing Fund (QEF)

Only applicable if a QEF election has been made:

• Reports your pro-rata share of the PFIC’s:
• Ordinary earnings
• Net capital gains
• Requires the PFIC to provide a valid Annual Information Statement

Part V – Gain from Disposition of PFIC Shares

Used when you sell or otherwise dispose of PFIC shares under QEF or MTM treatment:

• Reports total gain or loss
• Determines how much of the gain is taxable under the selected method

Part VI – Mark-to-Market Income or Loss

Applicable only when a Mark-to-Market election is in place:

• Reports annual unrealized gains or losses based on end-of-year fair market value
• Gains are treated as ordinary income
• Losses are allowed only to the extent of prior MTM gains

Part VII – Additional Information

Captures supplementary details:

• Indicates whether the PFIC is indirectly owned
• Discloses ownership through another foreign entity or entity structure
• Addresses FATCA reporting obligations

When and How to File Form 8621

Filing Form 8621 correctly and on time is essential for staying compliant with IRS rules for foreign investments. Although the form serves a specific purpose,reporting ownership and income from PFICs,it is not submitted independently in most cases.

Filing with Your Tax Return

Form 8621 must be attached to your annual federal income tax return (typically Form 1040 for individuals) and submitted by the standard tax filing deadline, including any extensions. A separate Form 8621 must be included for each PFIC you own, even if no income or gains were realized during the year.

If You’re Not Required to File a Tax Return

Even if you are not otherwise required to file a U.S. tax return (for instance, if you have no taxable income), you may still be required to file Form 8621 on its own. In such cases, the form must be printed and mailed directly to the IRS, as outlined in the official IRS instructions. Failing to do so may trigger penalties or keep the statute of limitations open on your entire return.

2025 Update

As of the 2025 tax year, there have been no changes to reporting thresholds or exemptions related to Form 8621. However, the IRS has continued to increase enforcement of PFIC reporting rules, particularly in connection with foreign mutual funds and ETFs held through international brokerage accounts. For 2025, new rules clarify the overlap between Controlled Foreign Corporations (CFCs) and PFICs to prevent double taxation for U.S. shareholders. Additionally, tax proposals for 2025 may allow late QEF elections.

Common Mistakes in Form 8621 Filing

Even experienced investors can run into trouble with PFIC reporting. Here are some common missteps:

1. Failing to File: A common misconception is that you don't need to file Form 8621 if your investment in a Passive Foreign Investment Company (PFIC) is small. However, the IRS does not provide a minimum dollar threshold for PFIC filing. If you hold any shares in a PFIC, even if the investment is small, you are required to report it by filing Form 8621. 

Pro tip: Always file Form 8621 if you own any PFIC shares, regardless of size. Add it to your annual tax checklist to stay compliant.

1. Missing or Late Elections: PFIC shareholders have the option to make certain elections to mitigate the harsh tax consequences of PFIC investments. Two main elections are the Qualified Electing Fund (QEF) election and the Mark-to-Market (MTM) election. Both of these elections have strict deadlines, and if made too late, the investor will default to Section 1291 treatment, which is less favorable and results in higher taxes. 

Pro tip: Set reminders for PFIC election deadlines early in the tax year to avoid costly oversights.

1. Incorrect Gain Calculations: Under PFIC rules, the type of gain you report is crucial. PFIC investments are subject to complex tax rules, and gains can be classified as ordinary income or capital gains depending on how they’re realized. Misclassifying these gains,such as treating a gain that should be capital gain as ordinary income,can lead to underreporting of tax. 

Pro tip: Work with a tax advisor familiar with PFIC rules to ensure gains are accurately reported.

1. Overlooking Indirect Ownership: Another mistake investors often make is overlooking indirect ownership of a PFIC. If you hold shares in a foreign company that in turn owns a PFIC (e.g., a foreign mutual fund or another foreign entity), you might still be required to file Form 8621. Many investors mistakenly think that if they’re not directly holding PFIC shares, they don’t need to report. However, if the PFIC is held indirectly through another foreign entity, the ownership still counts, and filing is necessary.

Pro tip: Review all foreign holdings yearly to catch any indirect PFIC ownership that requires reporting.

1. Poor Recordkeeping: Accurate recordkeeping is critical when it comes to PFIC reporting. Many investors fail to keep track of key information, such as the PFIC’s financial statements, distributions, or the cost basis of their investments. Without this information, completing Form 8621 becomes extremely difficult, and investors might make errors in reporting income, gains, and distributions. Poor recordkeeping can lead to mistakes in calculations and missed opportunities to elect more favorable tax treatments, which could result in an overpayment of taxes.

Pro tip: Keep a dedicated PFIC file with investment statements, election details, and cost basis info for easy access during tax time.

Best Practices for PFIC Reporting and Form 8621

Proper planning and documentation go a long way in ensuring smooth PFIC reporting. Here are some best practices to stay on top of your Form 8621 obligations:

• Maintain Accurate Records: It’s crucial to keep all brokerage statements, PFIC disclosures, and annual information statements related to your foreign investments. Tracking key details such as acquisition dates and the cost basis for each investment will help you complete Form 8621 accurately when it’s time to file.
• Evaluate Elections Early: Consider making the Mark-to-Market (MTM) or Qualified Electing Fund (QEF) elections as soon as you purchase the investment, not during tax season. Elections must be made timely, as they cannot be applied retroactively unless special relief applies. Planning ahead will ensure that you make the most informed decisions and avoid missing deadlines.
• Monitor Investment Changes: Stay updated on whether any of your investments now qualify as PFICs. Some U.S. funds with foreign exposure may unexpectedly acquire PFIC status. Regularly reviewing your investments will allow you to adjust your filings accordingly and avoid compliance issues.
• Get Professional Guidance: Given the complexity of Form 8621, consulting a CPA or tax advisor experienced in PFICs is a wise decision. A professional can help minimize audit risks, ensure your filings are correct, and guide you through the tax rules specific to PFICs.
• File Every Year: Even if no income is received from the PFIC, you are still required to file Form 8621 annually. Consistent filing helps maintain the validity of any elections you’ve made, ensures compliance, and prevents penalties for non-filing. Regular annual filings also keep your tax records up-to-date and aligned with IRS requirements.

Conclusion

Form 8621 is a vital tool in the IRS’s efforts to track foreign investments and ensure compliance with tax rules related to PFICs. While the form is complex, taking time to understand its structure and staying proactive about elections and documentation can help investors avoid harsh tax consequences. Whether you’re new to international investing or managing a portfolio with multiple PFICs, knowledge of Form 8621 is non-negotiable. With the right approach and professional guidance, you can navigate these requirements confidently and efficiently.

At NSKT Global, we specialize in helping investors manage the complexities of Form 8621 and PFIC reporting. Our experienced professionals provide tailored guidance to ensure compliance, minimize risks, and optimize tax strategies, helping you stay on track with your international investments.

 

FAQs About Form 8621

 

Is there a minimum investment amount that requires Form 8621?

No. Any amount of PFIC ownership may trigger the requirement to file Form 8621. However, if the total value of PFIC holdings is less than $25,000 ($50,000 for joint filers), taxpayers may be exempt from filing Form 8621, unless an election is made. 

What happens if I don’t file Form 8621?

The IRS may suspend the statute of limitations on your entire return, and you may face penalties or unfavorable tax treatment.

Can I make both QEF and MTM elections?

Yes, but not for the same PFIC stock. The elections must be applied carefully and consistently.

Are U.S. mutual funds ever considered PFICs?

Typically, no. But some international or offshore funds held through U.S. brokerages may qualify, so due diligence is important.

Do I need to file Form 8621 if I hold PFICs through a retirement account?

Generally no, if the retirement account is tax-deferred (e.g., IRA or 401(k)). But special cases may apply.