My tax advisor suggested taking the mark to market election, as the tax owed would be on the gain/loss for the calendar year; and that this (most likely) would result in a lower tax burden.
I’m sure it depends very much on the IMGA numbers, as well as the start/end per-unit value for a given year as to which is more tax advantageous.
Surprisingly for the 1st time ever, I’ve been looking at an investment and not wanting it to appreciate.
For PFICs, is anything that is a gain of some type (whether going directly to you, or indirectly recycled within the fund) considered an excess distribution?
Note that MTM is listed as an election on the IRS PFIC 8621 form… so am guessing the form is still necessary
Based on my back-of-the-envelope math, the aggregate QEF is slightly higher than the aggregate MTM for 2021 on IMGA. As a consequence, one’s tax rate would need to factor into whether the QEF is better (majority capital gains taxes - seems to be long term) vs MTM at ordinary tax rates
BTW, does anybody know whether the QEF capital gains for IMGA in 2021 are short / long, or some combo information (which we never received)?
Any updates on this? I assume that be held less than a year, you mean you held the IMGA - Cat R fund for less than a year, but the capital gains themselves are unknown in terms of their classification?
No. It’s when there is a distribution (as in the fund writes you a check), and it’s “too much”. What defines too much? See rules. No, get a CPA that has a clue about the rules, because you have to do a back-calc for the last three years, impute how much SHOULD have been distributed to you over those three years, pay taxes on that, then pay penalties on those taxes because you should have paid those imputed taxes N years ago. Or something like that. If three years aren’t up yet, other rules apply. I didn’t look at it that hard, I simply recoiled in fear and let the sleeping dragon lie.
Excess distribution rules don’t apply to QEF.
The issue here is that you could tell a fund “please hold all my money for as long as possible so I don’t have to take a gain, whatever you’re doing internally”. No, the IRS thinks you’re supposed to distribute gains as soon as possible so they can tax you sooner. Which is really no different than the rules already applied to US mutual funds - US funds are required to distribute at least 90% of all gains during the tax year so you can get taxed on them.
If you elect QEF, then you are already handling the gains and losses of the fund as if it were a US-based fund in a timely manner, so no further figuring is needed.
Mark to market as marked will not necessarily map to the gain/loss you see on your PFIC statement. Mark-to-market values are “the value of the assets in the fund as of ”. The gains/income items of a PFIC statement are “gains and losses realized from transactions made by the fund during the year.” They’re not at all the same thing - the fund may be sitting on unrealized gains or losses that affect MTM value.
Suppose fund buys 100 SPX on Jan 1 at 300. SPX goes to 400. Manager sells 20 SPX @ 400 on Jan 30. SPX ends the year at 250. The manager made no trades after Jan 30. Your PFIC statement will show a gain of $2000. Your MTM value will show a loss of $2000. Both are true.
Now suppose your manager the following year sells 80 @ 250 on Jan 1, then does nothing else all year. SPX ends the year at 250. Your next year’s PFIC statement will show a loss of $4000 and your MTM value will show a gain/loss of 0. Again both are true.
I suspect for most people most of the time, it’s better to just elect QEF and forget about it. You can try to optimize, but you can also end up in a situation where you trigger some really unpleasant consequence that leaves you worse off. Of course there may be other considerations. If you want to spend the time and effort to game it out, more power to you, though.
As to whether a gain is short/long-term - I don’t think any other taxation regime differentiates short/long - the PT one doesn’t - so their accounting system probably doesn’t have the information to be able to report it. I think you have to assume short since you can’t substantiate long - but in the absence of data, well… your call. In any case, it has nothing to do with how long you’ve held your shares of IMGA - it’s how long IMGA held the shares of the underlying security. Remember the whole point of QEF is to turn the fund into a look-through/pass-thru entity for tax purposes.
You’re correct about excess distributions and I need to read F8621’s instructions more carefully. Line 5 conflates excess distr with inclusion / deduction.
[edited out the video reference for accuracy]
Agreed on this part
Simply pointing out that the aggregate IMGA QEF amounts were more than the MTM, if one held for the entire year
I think once you report the PFIC the first time based on the election of, for example, MTM, it becomes more difficult to change to a different methodology, to let’s say QEF, IMHO, but I’m likely not very well versed on this…
You can switch to QEF at any time later. The 10,000-ft of it is that you have to calculate all your taxes under the regular PFIC regime as if you sold it at the end of the previous year and pay those, then you start fresh as if you bought it Jan 1. I don’t know about going the other way but I suspect the principle is the same.
I won’t comment on specific line items for filling a form as I think it depends a lot on what you’re given by the fund, and I’m not super comfortable getting into “how do I fill out my 8621” - I’m dealing in the broad principles of the taxation regime to help you understand what the form is looking for. It all makes sense when you look at it through a certain lens, including the reasons the regime outside QEF is so punishing - I’m sure it was abused to high hell. It’s just that most people never have any reason to be familiar with that lens - it’s quite common when dealing with private equity/hedge funds, which is what all these fund investments are, but when does the average person (or CPA) ever have to deal with that?
I watched 8621 M2M Election based on the previously mentioned QEF video suggestion.
One thing mentioned was that to take a M2M election, the investment must be publicly traded. In the case of IMGA, which I perceive as being essentially a hedge/private fund, I don’t believe (but could be wrong) that it is publicly traded. And therefore M2M would not be an option - only QEF would be.
The instructions for the summary portion of F8621 in Part 1, Line 5 are strangely omitted by the IRS / Treasury, leaving it up to guess. My 3rd read suggests they are calling:
It’s basically a mutual fund with daily liquidity and pricing, but within PT, most people refer to it as an ETF
Excellent point about semantics of ‘publicly traded’ particularly as MTM usually refers to pricing-based liquidity in the HF world and accounting world (as Level 1 assets)…
“Publically traded” can apply to shares of a mutual fund. The point is more that the shares are available to the general investing public in some reasonable manner and that there is a valid regularly-audited published daily mark that can be used to determine a fair NAV to mark to. Indeed most applications of the PFIC rules are to people who buy into foreign mutual funds, which is what IMGA is. It’s when it’s private equity and the NAV can be easily manipulated or lied about that there’s a real issue - then you can game the mark to be whatever happens to benefit you most.
So, this is interesting. This is the first time I’ve bothered digging into any of this, I’ve been dealing in broad principles. But since this answers the question at hand:
26 US Code 1293:
(a) Inclusion
(1) In general
Every United States person who owns (or is treated under [section 1298(a)] as owning) stock of a qualified electing fund at any time during the taxable year of such fund shall include in gross income—
(A) as ordinary income, such shareholder’s pro rata share of the [ordinary earnings] of such fund for such year, and
(B) as long-term capital gain, such shareholder’s pro rata share of the net capital gain of such fund for such year.
So you get long term cap gains treatment by default for QEF. No if/and/but, it’s unqualified gospel.
BUT you also have to track basis for your shares annually, with any item of income/loss directly affecting your basis. So if you buy a share for $100, and there’s $5 of “ordinary income” and $3 “capital gain” then you report your $5 of ordinary income and $3 of long term cap gain on your tax return through 8621, then increase your basis to 108. Which makes sense, really.
So let’s say:
buy 1/1/2022 for $100
12/31/2022 - $5 ordinary income, $3 cap gains
report $5 / $3. Your basis now 108.
12/31/2023 - $6 ordinary income, $2 cap gains
report $6 / $2. Your basis is now 116.
sell 1/1/2024
your shares are now worth 116, theoretically. But your basis is 116. so net gain on sale is 0.
Which is about how you’d expect this to work. You’re being taxed as you go, so you don’t get taxed at the end.
Now there’s some weirdness that can happen under certain situations that I’m not going to explore here, if say there’s a huge cap gain but an ordinary loss, something like that. This shouldn’t happen.
So one of the things you’re paying your friends at PFIC Pro for is handling the basis calculations correctly over the N years you hold the fund, depending on what actually happens. You can do it yourself if you prefer.
For some cases, MtM may be simpler. At least it’s more straightforward. It just means you get no cap gains treatment on any of the gains or income. For some people in some cases, this may be preferable, though, because it also means all losses are ordinary and ordinary losses are immediately beneficial, whereas cap losses are not.
They’re not really omitted so much as presuming a certain understanding of purpose.
This is a summary. It’s really just rolling up all of the rest of the information you’re putting in. Think of it as “what’s my total income that I’m reporting”. So if your Part 3 shows $5 of ordinary income and $3 of cap gains for a QEF, your 5b is “8”.
This sounds stupid, but hey, it’s a summary, right?
That’s my interpretation too. On your second point specifically (as quoted in the box immediately above) if one did not adjust the basis for the QEF, then it would be double-taxed at time of sale since there would be annual tax payments for (a) UnQual Div + (b) unrealized CG, but also taxes on realized CG at time of sale
Yes, good to see interpretations are aligning
Thank you @jb4422 for taking time out to review this as well
Not sure if the following is a simple question, but do you see some option to (effectively reverse the order: QEF in a preceding year followed by a MTM in a subsequent year):
start off with a QEF in year [x],
pay the Div + CG,
gross up the to the new adj. basis at that year [x] based on the cost_basis + Div + CG
during year [x+1] do a MTM?
Theoretically, the cost-basis for MTM in [x+1] will be the adj. basis at year [x]; would this seem to be the right direction?
No. Pretty much once you elect QEF (or MTM for that matter), it’s done. You have to get permission to switch, in the face of “substantial change in circumstances”. Which makes sense to me, it’s too easy to either game it out or just create an even nastier paper trail to have to unwind.
but am guessing there is some semantics when you say this:
I realize none of us are tax experts, so simply hoping to be smart on the subject before speaking with one, as this appears to be a confusing subject. I wonder if the reason most main-stream lawyers don’t touch PFIC is because it’s used as a tool by the IRS to go after folks who legitimately want to report correctly but make some esoteric error due to poor instructions.
In any case, it has nothing to do with how long you’ve held your shares of 