Hi All - I thought I would also share my experience e-filing using TaxAct ($30 promotional rate with Form 8621 included) in case others find it helpful. I successfully e-filed last week, and my return has (so far) been accepted without any problems. Since I spent 30+ hours reading and doing my best to understand the rules, I thought it might be helpful to brain dump here while it is still fresh on my mind. (Apologies for the amount of text below, but the tax rules are truly mind-numbing and impossible to explain concisely!)
Disclaimer: I am not a tax professional so my comments cannot be considered professional advice. If anyone finds errors in my comments I am happy to be corrected. Everyone’s tax situation is unique, and the QEF rules are MADDENINGLY complex.
Background: I invest with Optimize and chose the QEF election on my taxes. The vast majority of my income is employment income, and my only foreign asset is the Optimize investment. Thus, my taxes are very simple apart from the Optimize QEF piece. However, one complication in my case is that I am subject to the 3.8% Net Investment Income Tax (NIIT) since my income is above the threshold. This was very confusing to understand, but the gist is that there are entirely separate QEF tax rules for regular “chapter 1” income and for “section 1411” income (that is, investment income subject to the NIIT). Also, each tax regime has options regarding when to pay the tax:
| Decision |
QEF Regular “chapter 1” income tax |
QEF “Section 1411” income tax (NIIT) (applies only if modified AGI exceeds the threshold) |
| Pay now |
(default) |
called a “1.1411-10(g) election” |
| Defer |
called a “1294” election |
(default) |
I chose the path of least resistance and selected the default options for both tax regimes. The non-default options would require additional documentation and certifications and might have hindered my ability to e-file. Confusingly, the default options are opposite of one another. This means that in practice, I am paying the QEF tax on my regular income spread throughout the lifetime of my investment, but my NIIT will be due entirely at the end when I sell the investment. Also, since the timing of each tax is opposite one another, I will need to track the relevant tax “basis” for each type of tax separately through time, which is slightly annoying but manageable. (See basis comments at the end.)
My Process: I concluded that I should file information on four forms: 8621, 8938, 8949, and 8960.
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8621 - Accessible as a manual form entry in the “Tools” → “Forms Assistant” area of TaxAct, this is where you fill out the PFIC fund information and elect to treat the PFIC as a QEF (checkbox “A” under “Part II”). You can also choose the deferral “Section 1294” option by checking box “B” in addition to box “A”, though the 1294 record-keeping burden in Part VI looks tedious. For this reason, I did not check box “B”, and anyway, I prefer to spread out my taxes over time.
Part I - mostly self-explanatory. For the value of the shares, I used my year-end Optimize account statement together with the Banco de Portugal online currency converter, which gave a conversion rate of 1 EUR = 1.17500 USD at year-end. For line 5, I checked (b) Section 1293/QEF and entered the total amount of both the QEF Ordinary Earnings + Net Capital Gains provided by Optimize on the PFIC Annual Information Statement that they sent me.
Part II - check box “A”
Part III - Enter the QEF Ordinary Earnings on lines 6a & 6c. Enter the QEF net capital gains on lines 7a and 7c.
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Form 8938 - This form looks intimidating, but (after including the basic taxpayer identifying information) if the Optimize fund is your only foreign asset, I believe you can leave Form 8938 blank apart from putting a “1” on line 18 “Number of Forms 8621”. This tells the IRS that the info is already provided on Form 8621 so that you do not need to fill it out again.
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Form 8949 - Note that in TaxAct, you do not edit this form directly. Instead, the 1099-B info automatically feeds into Form 8949, so enter the info in the same “Capital Gains or Losses” area where you would normally input 1099-B info.
Background: Frustratingly, while TaxAct does automatically import the QEF Ordinary Earnings into “Other Income”, which ultimately rolls up into line 8 on Form 1040, it does NOT automatically handle the QEF net capital gains piece. You must add the QEF net capital gains manually yourself and make sure that they receive the correct 15% long-term capital gains treatment. I have read different opinions about what 1040 Income line to use to plug the QEF capital gain. To solve this problem, I entered the info into Form 8949 based on a note on the Form 8949 instructions:
"
Other gains (or losses) where sales price or basis isn’t known.
If you have another gain (or loss) for which you don’t know the sales price or basis (such as a long-term capital gain from Form 8621), enter a description of the gain (or loss) in column (a) on Part I with box C or box I checked or Part II with box F or box L checked (depending on how long you held the property). If you have a gain, enter it in columns (d) and (h). If you have a loss, enter it in columns (e) and (h). Complete any other columns you can.
"
Because the Form 8949 instructions specifically call out Form 8621 as a relevant example, I felt reasonably confident that this is an acceptable approach.
In the capital gains area, I entered the following information to record the QEF capital gain:
Select option “F”: Long-term transactions, other than digital asset transactions, not reported to you on Form 1099-B or Form 1099-DA. (Choose option “F” because the capital gain is meant to be taxed at the long-term capital gains rate.)
Description (column (a)) - Describe the capital gain and refer back to Form 8621.
Date acquired (column (b)) - enter the date acquired. I put “Various” since I invested multiple times with Optimize throughout the year. If you invested prior to 2025, I suppose you could put 01/01/2025 here.
Date sold (column (c)) - I put 12/31/2025 since the Optimize PFIC Annual Information Statement aligns with the calendar year.
Proceeds (column (d)) - I put the full amount of the QEF capital gain.
Cost or Other Basis (column (e)) - I put $0. This way, the entire amount of the QEF capital gain flows into column (h), gain or loss, as appropriate, following the form 8949 instructions example.
Following the above procedure, your QEF capital gain should automatically roll up into line 10 of Schedule D and also automatically roll up into line 7a of 1040.
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Form 8960 (Net Investment Income Tax (NIIT)) - As I mentioned above, I must pay this tax because my modified AGI is above the threshold, but if you are not subject to this tax, then you should not have to worry about this piece.
I believe that I have two choices: either to 1) exclude the QEF capital gain from the calculation of the NIIT, in effect deferring any QEF-related NIIT to a future year (the default option), or 2) to take a “section 1.1411-10(g) election”, which recognizes the QEF income (both dividends and capital gains) now for the purpose of the NIIT calculation.
For simplicity, I chose to exclude the QEF income for the purpose of the NIIT. To remove the current-year QEF net capital gain rolling up into line 5a of Form 8960, I subtracted it out on line 5b of Form 8960. This prevents the QEF net capital gain from being lumped in with any other capital gains for the purpose of the Net Investment Income tax. I think this is correct based on the following instructions for Form 8960, Line 5b–Net Gain or Loss from Disposition of Property That Isn’t Subject to Net Investment Income Tax:
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Shareholders of CFCs and QEFs without a section
1.1411-10(g) election. In the case of a QEF (other than
a QEF held in a section 1411 trade or business) for which
a section 1.1411-10(g) election isn’t in effect, enter the
amount treated as long-term capital gain for regular
income tax purposes under section 1293(a)(1)(B).
"
The other QEF income piece - The QEF “ordinary earnings” - does not need to be subtracted out because it is already not included anywhere automatically on Form 8960.
(Obviously, if I had made the opposite choice to pay the QEF NIIT now, then I would not subtract the QEF capital gain on line 5b and I would add in the QEF ordinary earnings on line 6.) Looking ahead, assuming I never take the 1.1411-10(g) election, I believe that in a future tax filing year, after I’ve sold the Optimize investment, I will need to record all of my cumulative QEF cash proceeds over the purchase cost on line 6 to recognize the entire NIIT spanning several years all at once.
The form 8960, Line 13 instructions also say to subtract any QEF income (both pieces, the ordinary earnings and capital gains) from the Modified adjusted gross income listed on line 13, since I am electing not to include the income in the NIIT calculation in the first place. I was not able to find a way to do this using TaxAct, but it did not matter for the purpose of my tax calculation, so I proceeded anyway. (This could be a barrier to e-filing with TaxAct if this MAGI QEF conforming adjustment matters in your case.) In the future, after I dispense of my Optimize investment, I will need to adjust up the MAGI on form 8960 for all of the QEF income earned over the lifetime of my investment.
Finally, a note about tax basis: Although Optimize provides the USD amounts of QEF Ordinary Earnings and Net Capital Gains on the PFIC Annual Information Statement, this does not absolve us of needing to track the tax basis (the sum of the purchase cost + any previously taxed amounts). I believe I still need to keep track of the basis in case there is any residual capital gain or loss at the moment that my investment is sold/disposed. If there is a residual gain or loss (for either regular income tax purposes or the NIIT), I think I would need to report it as appropriate. The tax basis calculation will depend on when you choose to pay the tax (Pay Now or Defer, as in the table at the top). Since I chose “Pay Now” for regular income tax and “Defer” for section 1411 income, I will need to keep track of two separate bases. Because of the choices I made, my QEF basis for regular income tax purposes will be = purchase cost + (already taxed) QEF ordinary income + (already taxed) QEF Net Capital Gains, whereas my QEF basis for NIIT will remain = purchase cost.
Hope this helps, and also happy to hear critiques if I did not quite get everything right! (I also still need to complete the FBAR / FinCEN Form 114 reporting, but hopefully this is not too painful.)