The PFIC de minimis exception may exempt you from annual Form 8621 reporting if your total PFIC holdings are $25,000 or less, or $50,000 or less if married filing jointly.
The exception may not apply if you received an excess distribution, sold PFIC shares at a gain, or have another Form 8621 filing requirement.
Americans living abroad often discover the PFIC rules after investing in foreign mutual funds, ETFs or other pooled investments that are perfectly ordinary in their country of residence.
Under US tax rules, however, many of these investments can be classified as Passive Foreign Investment Companies (PFICs) and potentially require Form 8621.
There is a limited exception for taxpayers with relatively small PFIC holdings, commonly referred to as the PFIC de minimis exception or PFIC $25,000 exception.
The exception can remove the annual Form 8621 reporting requirement in certain circumstances, but the $25,000 threshold is often misunderstood. It is not a general rule saying that anyone with less than $25,000 invested in PFICs can ignore Form 8621.
Whether the exception applies depends on the total value of your PFIC investments, how you own them and what happened with those investments during the tax year.
Key Takeaways: PFIC De Minimis Exception
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The PFIC de minimis threshold is generally $25,000 for individual filers and $50,000 for married couples filing jointly.
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The $25,000 threshold generally considers your aggregate relevant PFIC holdings, not $25,000 for each individual investment.
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A separate $5,000 exception may apply to certain indirectly owned PFIC interests.
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The exception applies to the annual reporting requirement for certain Section 1291 funds; it is not a blanket exemption from all Form 8621 requirements.
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Receiving an excess distribution or recognizing gain on the sale or disposition of a Section 1291 fund can prevent the exception from applying to that fund.
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The exception does not mean your investment stops being a PFIC or that PFIC tax rules no longer apply.
PFIC De Minimis Exception
| Question | What You Need to Know |
| Individual threshold | $25,000 or less |
| Married filing jointly | $50,000 or less |
| Certain indirectly owned PFICs | $5,000 or less |
| When is value generally tested? | Last day of the tax year |
| Is the $25,000 threshold per PFIC? | No, relevant PFIC holdings are generally aggregated |
| Does an excess distribution affect the exception? | Yes |
| What about selling a PFIC at a gain? | The exception generally does not apply to that Section 1291 fund if gain is recognized |
| Does the exception eliminate PFIC taxation? | No. It is a limited reporting exception |
What is the PFIC De Minimis Exception?
US persons who own PFICs can have an annual reporting requirement under Section 1298(f), even if they did not sell the investment or receive a distribution during the year.
The PFIC de minimis exception provides relief from this annual reporting requirement for certain smaller PFIC holdings.
Under current IRS Form 8621 instructions, a shareholder generally does not have to complete Part I for a particular Section 1291 fund when the shareholder meets the $25,000 exception on the last day of the tax year and does not receive an excess distribution or recognize gain on the sale or disposition of that fund.
For taxpayers filing a joint return, the threshold increases to $50,000.
The important distinction is that this is a reporting exception. It does not mean the foreign investment is no longer a PFIC, nor does it provide a general exemption from PFIC taxation.
How Does the $25,000 PFIC Exception Work?
For an individual filer, the relevant threshold is generally $25,000 or less on the last day of the tax year.
However, you generally need to consider your total relevant PFIC holdings when determining whether you are below the threshold.
This includes relevant PFIC stock owned directly or indirectly, including QEFs, Section 1291 funds and PFIC stock subject to a Section 1296 mark-to-market election, although certain PFIC interests held through another US person or another PFIC are excluded from this particular threshold calculation.
That means the rule generally cannot be applied separately to every foreign fund in your portfolio.
Example: Multiple Foreign ETFs
Suppose an American living in Germany owns three foreign ETFs classified as PFICs:
| Investment | Year-End Value |
| ETF A | $10,000 |
| ETF B | $8,000 |
| ETF C | $9,000 |
| Total | $27,000 |
Each individual ETF is worth less than $25,000.
However, the relevant aggregate PFIC holdings are $27,000. In this simplified example, the taxpayer exceeds the $25,000 threshold.
This is why the PFIC de minimis exception should not be interpreted as allowing $25,000 per foreign fund.
Not Sure If Your Holdings Add Up to $25,000?
It’s easy to miscalculate when PFIC holdings need to be combined across accounts and investments. We can review your full portfolio and tell you exactly where you stand.
What is the $50,000 PFIC Threshold for Married Couples?
Taxpayers filing a joint US tax return have a combined threshold of $50,000 instead of $25,000.
The PFIC holdings of both spouses are considered when applying this threshold.
For example, suppose one spouse owns $20,000 of relevant PFIC investments and the other owns $25,000.
- Their combined PFIC holdings are $45,000.
- They may therefore fall within the $50,000 threshold, provided the other requirements for the exception are satisfied.
If their combined relevant holdings were $55,000, they would exceed the threshold.
What is the $5,000 Exception for Indirectly Owned PFICs?
There is a separate de minimis rule for certain indirectly owned Section 1291 funds.
A shareholder may not have to complete Part I for a particular indirectly owned Section 1291 fund if the value of their proportionate interest is $5,000 or less on the last day of the tax year, provided they did not receive an excess distribution or recognize gain on a disposition of that fund.
For this exception, the shareholder considers the value of their proportionate share of the particular Section 1291 fund.
Indirect PFIC ownership can be complicated because a taxpayer may be treated as owning PFIC shares through another entity or investment structure. The ownership chain should therefore be reviewed before relying on the $5,000 exception.
When Does the PFIC De Minimis Exception Not Apply?
The biggest mistake is assuming that staying below $25,000 automatically means Form 8621 is never required.
It doesn’t.
Form 8621 can be required for several different reasons. According to the IRS, a US person who owns a PFIC directly or indirectly generally may have a filing requirement when the taxpayer:
- Receives certain PFIC distributions;
- Recognizes gain on a disposition of PFIC stock;
- Reports information relating to a QEF or Section 1296 mark-to-market election;
- Makes certain PFIC elections; or
- Is subject to the annual reporting requirement under Section 1298(f).
The $25,000 de minimis exception primarily addresses that fifth category—the annual reporting requirement.
You Received an Excess Distribution
The exception generally does not eliminate the relevant Form 8621 reporting when you receive an excess distribution from a Section 1291 fund.
An excess distribution can be subject to the special PFIC tax and interest-charge regime.
Therefore, an American with a $10,000 PFIC investment cannot simply conclude that Form 8621 is unnecessary because the investment is below $25,000 if an excess distribution occurred during the year.
You Sold or Disposed of the PFIC at a Gain
A disposition can also prevent you from relying on the de minimis exception for that Section 1291 fund.
The IRS specifically conditions the exception on the shareholder not recognizing gain on the sale or disposition of the Section 1291 fund stock.
For example, suppose you own a foreign ETF worth $15,000 and sell it at a gain.
The fact that the investment was below $25,000 does not by itself eliminate the Form 8621 filing requirement.
You Have the QEF Election
A Qualified Electing Fund (QEF) election provides an alternative method of taxing certain PFIC investments.
Form 8621 is used to report QEF information and make certain PFIC elections, so taxpayers using this regime should not assume the $25,000 exception eliminates their filing obligations.
You Have a Mark-to-Market Election
Certain marketable PFIC stock may qualify for the Section 1296 mark-to-market election.
A taxpayer using this method generally reports annual mark-to-market income or loss on Form 8621. Therefore, having less than $25,000 invested does not automatically eliminate the reporting associated with the election.
Had a Distribution, Sale, or PFIC Election This Year?
Any of these can override the de minimis exception, even if your holdings are small. Let’s confirm whether Form 8621 is actually required in your case.
Does the PFIC De Minimis Exception Mean You Don’t Owe PFIC Tax?
No.
The PFIC de minimis exception is a reporting exception, not a rule making PFIC income or gains tax-free.
A foreign fund can still be classified as a PFIC even if its value is only $5,000, $10,000 or $20,000.
The exception does not:
- Change the investment’s PFIC classification;
- Turn the investment into an ordinary US mutual fund;
- Exempt future distributions from the PFIC rules; or
- Exempt future gains from PFIC taxation.
If the investment increases in value, produces an excess distribution, is sold or becomes subject to a QEF or mark-to-market election, the reporting requirements may change.
Example: American With a €15,000 Foreign ETF
Suppose an American living in Spain owns a European ETF classified as a PFIC, worth $18,000 at year-end. The taxpayer files individually and has made no QEF or mark-to-market election.
Here’s how the $25,000 PFIC de minimis exception may apply in different situations:
| Scenario | PFIC Value | Form 8621 Requirement |
|---|---|---|
| 1. One ETF, no sale or excess distribution | $18,000 | May qualify for the exception |
| 2. Two ETFs worth $18,000 and $12,000 | $30,000 combined | Generally required because total holdings exceed $25,000 |
| 3. One ETF sold at a gain | $18,000 before sale | May be required despite being below $25,000 |
Key takeaway: The $25,000 threshold applies to the combined value of relevant PFIC investments, not each investment separately. Even below this threshold, selling a PFIC or receiving an excess distribution may trigger Form 8621 reporting.
How Do You Determine the Value for the PFIC Threshold?
The $25,000, $50,000 and $5,000 thresholds are generally measured using the applicable PFIC value on the last day of the taxpayer’s tax year.
Treasury regulations also allow shareholders to rely on periodic account statements provided at least annually when determining PFIC value unless the shareholder knows, or has reason to know based on readily available information, that the statement does not provide a reasonable estimate.
Americans holding PFIC investments denominated in euros, pounds or another foreign currency will ultimately need to consider the investment’s value in US-dollar terms for US tax reporting purposes.
Does the PFIC De Minimis Exception Apply to Foreign ETFs?
It can, provided the foreign ETF is a PFIC and all requirements for the exception are satisfied.
Foreign ETFs are particularly important for Americans abroad because many non-US pooled investment funds can fall within the PFIC definition.
Under US law, a foreign corporation generally qualifies as a PFIC if at least 75% of its gross income is passive income or at least 50% of its assets produce, or are held to produce, passive income.
An American holding several foreign ETFs may therefore own several PFICs simultaneously.
Before applying the $25,000 exception, the taxpayer needs to identify all relevant PFIC holdings rather than looking at the balance of only one investment account.
Should You Rely on the $25,000 PFIC Exception?
Before relying on the PFIC de minimis exception, determine:
- Whether the investment is actually a PFIC;
- Whether it is a Section 1291 fund;
- Whether you own other PFICs that count toward the threshold;
- Whether your aggregate holdings exceed $25,000 or $50,000;
- Whether an indirect PFIC qualifies for the separate $5,000 exception;
- Whether you received an excess distribution;
- Whether you sold or otherwise disposed of PFIC shares; and
- Whether a QEF, mark-to-market or another PFIC election applies.
The value of the investment alone does not determine whether Form 8621 is required.
