There isn’t a “right” answer on M2M/QEF, it’s just a choice. Most people end up better off with QEF because whatever portion is eligible for cap gain treatment will get it, whereas M2M as you see is indeed just ordinary income.
M2M is simpler of course. But you are still filing 8621 to elect it so meh.
You do NOT have the option of shifting to QEF. Once elected, always elected. This is not entirely true, there is a path, but you have to write to the IRS and request the change and it has to be approved and there has to be a good reason. This is documented in the instructions for 8621. You probably have better things to do with your life than this.
You are correct, any loss simply comes off as negative ordinary income. This is not at all unprecedented. Section 988 income for currency traders can generate a loss which drops into the misc income line of 1040.
You are almost correct, just that the time horizon to be applied is different than what I imagine you are thinking.
If you translate the instructions into human-speak, what they are really saying is “you can’t lose more than you invested in the first place.” Which sounds silly but can end up happening in these kinds of investments. I won’t get into how that can happen, just take it on faith. So you need to look back all the way to the beginning of the investment, add up ALL the gains and losses over the years that you have claimed, and if the net of ALL of that is a loss, then you don’t get to claim as a loss the amount that would mean you lost more than your original investment. Which makes sense, because if they allowed this, you’d be “making” money off the government (by deducting the loss) and someone would figure out how to do it at scale.
That said, with these kinds of investments, this is unlikely to apply to you so I wouldn’t sweat it.
I’m really thinking of throwing in the towel. Am hoping folks here can help me clarify my thinking. And yes, I know it depends on my ultimate goals, and no-one’s goals are exactly the same, so more than anything I’m looking to get a sanity check on my thought process.
For me, the issue boils down to US taxation. As I mentioned in another thread, IMO, this is the hidden cost of the GV that no one really acknowledges as part of the process. That I am paying a hefty tax to maintain the investment is one thing. I could justify it if I was receiving a compensating benefit. IE residence card. But I’m not (due to SEF bureaucracy), so there is simply a cost (taxes) and no benefit. And no end in sight.
Background – I just above the bare minimum into IMGA Ações PT-R late last year (2021). As I didn’t know about QEF vs M2M, my accountant put me down for M2M. In holding the fund for all of 3 weeks, I ended up owning an extra 2k$ in taxes. Then I found out about the QEF. But it was too late to do anything about it. I chalked it up to an expensive lesson, vowing to do QEF for 2022.
For 2022, I’ve held the fund for the entire year and a M2M calculation shows about 20k$ in ordinary income which, for various other non-GV reasons, would be counted in a fairly high marginal tax bracket. Meaning easily 5-7k$ in more taxes. For QEF, I’m guessing it’s a crapshoot. What ever %s IMGA reports is what counts for 2022 ordinary income and gains income. Given the exchange rate fluctuations, and that it appears IMGA calculates the exchange rate into its %s, what is the likelihood that IMGA would report a loss? For those who have done QEF in the past, what is the likelihood that the total tax bite would be less than the M2M election?
I realize 2022 is a sunk cost – my goal is simply to minimize the tax bite. My more fundamental question is – can I expect the IMGA fund taxation to continue to cost me +/- 5k$/year? Because that is what I have to factor into the Benefit/Cost ratio and decide whether I continue or not.
Thank you for your thoughts, the support of this community has been of immense value over the past year.
Agree with all points. It hurts to pay the taxes on unrealized gains.
Remember the PGV is a loss making investment on the whole (all categories).
I would ask some one, what do you get in return and if you are happy with it. Unfortunately that can only be answered in the future. I am myself on the fence, even though I have made all the way to biometrics stage.
It looks like the benefits are far less for the cost paid with many unknowns. I am not wealthy enough to squander tens of thousands of dollars on this venture and turn a blind eye. so neeed to carefully decide.
Will the stock market and/or exchange rates go up or down? If you can answer that then you can answer your question.
If your question is “will I continue to pay a high tax rate up front while having all my gains trapped in the fund” then the answer is yes.
Remember that losses count as ordinary losses too, they come right off income, no limit. So as it goes up or down you’re really paying your ordinary tax rate on the net total gain at the end of it all. Just that you are pre-funding it. There is no escaping that.
As I’ve written, this is the world of private equity. It isn’t all that tax friendly. Remember that when you see people talking about returns from Citadel or Renaissance; you have to get significantly higher returns just to get past the tax burdens.
The end goal has been exactly that; flexible residency with the option of citizenship. What I’m questioning is whether the cost justifies the ends. Hence, trying to get an assessment of cost to see if the benefits outweigh.
That SEF has taken so long, with no end in sight (another thread) to me creates a cost with zero value received as compensation. That, I wasn’t expecting on entry to this venture.
Remember that losses count as ordinary losses too, they come right off income, no limit.
Ahh - so what IMGA could report might be a loss? How would that show on their PFIC statement? Or are you referring only to M2M?
As I’ve written, this is the world of private equity. It isn’t all that tax friendly. Remember that when you see people talking about returns from Citadel or Renaissance; you have to get significantly higher returns just to get past the tax burdens.
Maybe that’s it in a nutshell - Significantly higher returns to get past the tax burden. IMGA isn’t going to generate 20%. To me that means the real ‘return’ is, as @garrett describes, the flexibility of residency. Which due to SEF delays is not happening, so my ROI is zero. Hence my questioning the whole enterprise.
Yes, IMGA can report losses, same as any other mutual fund. Or you can take a hit because of currency conversion since you have to mark to USD. Or the Portuguese stock market goes down and you have to mark that to market. There are many scenarios here and I am not going to go into all of them. There are always plenty of ways to lose money.
Sometimes I wish there was a place to hang a huge “HERE THAR BE DRAGONS” sign on all of this stuff. You go offshore, you can pitch the rulebook and all the average person’s assumptions about how things work in the trash bin.
I could be missing something for US-persons, but did not everyone lose money YoY (2022 vs 2021) on a USD-basis, and get hit with paying Div + CGT also?