Does anyone have experience with navigating PFIC taxation on their PGV fund investment? In this NomadGate article, they state taxation is flat 37% on gains from funds, unless treated with a QEF election or the mark-to-market accounting method on the relevant IRS 8621 form. 37% is a huge chunk and may defeat one major factor in our decision to go with a fund or commercial real estate. My accountant has no experience with this, so I am looking for knowledge here.
If your accountant has no experience, you might consider another accountant.
Be that as it may, the word here, from my experience, is beware. Many many rabbit holes to fall into. And IMO, this is the true hidden cost of the GV no one tells you about.
From my understanding (an others have much more experience than me):
M2M - Take the value in EUR on Jan 1, convert to USD. Take the value on 31 Dec. Convert to USD. Compare the two and that difference goes in as ordinary income. How you convert to USD is the tricky part. My accountant uses the IRS published average for the year. Even thought the IRS webpage says it doesn’t really care as long as you use a reputable conversion rate source and use it consistently. What I have seen is that how my accountant handles it turns what I what I would think is a loss into a gain. Meaning I now would pay more taxes. Note what this means is that your USD value on 31 Dec and 1 Jan can be completely divergent, since a average annual conversion rate is applied.
QEF - you get a document from the fund itself (not necessarily the bank) telling you the % (in small decimal fractions) of ordinary (ie dividends) and capital gains per share owned per day. You multiply the # days * # shares * the small fraction and that tells you the ordinary income and capital gains in USD you report. So somewhere in what the fund is reporting, they’ve handled to EUR->USD conversion. Also, the document you get from the fund may well not be available by 15 Apr, so you should be prepared to file for an extension, should you chose the QEF route. Plus, as previously posted in another thread, once you go QEF, there’s no going back to M2M.
I have not done a QEF yet (this is only my 2nd tax year on this journey), but plan to this year, as the aforementioned M2M arithmetic will cost me ~ 5-7k$ in extra taxes. For the QEF, the dividend income would be taxed at whatever your marginal bracket rate is, an the gains are taxed as… long term? Or is it short? I honestly don’t know and am hoping someone else knows. Because if the QEF would cost more than the M2M 5-7k$ in taxes, then I might as well skip the extension and be done with it.
I reiterate - the above is my very novice understanding and you should get advice from a professional for this. Turbotax doesn’t cover 8621, you need to file a FBAR, etc, etc… lots of little gotchas the a pro knows and I don’t.