# PFIC (foreign mutual fund) class exchange



## yalaki (Mar 29, 2016)

Hi all,

I am in the arduous process of filling in my first US tax return as a "US person".

I have investments in the UK, including shares in several funds, or "PFICs" as the US like to call them. (I am declaring these on 8621 and electing mark-to-market.)

For one fund, my brokerage firm exchanged the share class of the shares, from fund ABC class X to fund ABC class Y - same fund, different class - in a move they negotiated with the fund. In the UK this is deemed as a nontaxable event. And from what I can see, the IRS deem similar actions for US mutual funds as nontaxable events too. (It is only taxable when the exchange involved a change of fund).

My question is, do the IRS see the exchange for the PFIC as a nontaxable event? Does anyone know?

Thanks for reading!


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## BBCWatcher (Dec 28, 2012)

How would it matter if you're making mark-to-market elections?


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## yalaki (Mar 29, 2016)

BBCWatcher said:


> How would it matter if you're making mark-to-market elections?


It probably doesn't matter.

I found out that this process of switching fund class is not a taxable event for US mutual funds. However since this is a PFIC, it is still not clear to me that this is not a taxable event, though I guess I can claim it is not. It just makes filling in 8621 a little confusing since you have to declare the share class, which of course has changed.


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## BBCWatcher (Dec 28, 2012)

Why not just claim it as a taxable event within the mark-to-market treatment?

Share Class A starting fair market value: $10
Share Class A ending FMV: $11
Share Class B acquisition FMV: $11
Share Class B ending FMV (end of year): $12

$1+$1=$2 mark-to-market gain

Unless I'm missing something?


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## yalaki (Mar 29, 2016)

There's the gain before I became a US person, so it is not so straightforward I don't think? Declaring as a taxable event means CGT is realised from when I first owned the shares, before becoming a US tax resident.


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## BBCWatcher (Dec 28, 2012)

No, it just means the cost basis is set as of the date you became a U.S. person. So in that example above the starting value of Share Class A is the starting value based on the close of trading on February 2, 2015, let's suppose, if you became a U.S. person on February 3, 2015.


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## yalaki (Mar 29, 2016)

BBCWatcher said:


> No, it just means the cost basis is set as of the date you became a U.S. person. So in that example above the starting value of Share Class A is the starting value based on the close of trading on February 2, 2015, let's suppose, if you became a U.S. person on February 3, 2015.


I thought it was the adjusted basis that is set as the value on the day you become a US person. For capital gains tax, you still need to account for the gains made before becoming a US person, no? This is an example from Section 1296 (I can't post the link):



> A, a nonresident alien individual, purchases marketable stock in FX, a PFIC, for $50 in 1995. On January 1, 2005, A becomes a United States person and makes a timely section 1296 election with respect to the stock in accordance with paragraph (h) of this section. The fair market value of the FX stock on January 1, 2005, is $100. The fair market value of the FX stock on December 31, 2005, is $110. Under paragraph (d)(5)(i) of this section, A computes the amount of mark to market gain or loss for the FX stock in 2005 by reference to an adjusted basis of $100, and therefore A includes $10 in gross income as mark to market gain under paragraph (c)(1) of this section. Additionally, under paragraph (d)(1) of this section, A's adjusted basis in the FX stock for purposes of this section is increased to $110 (and to $60 for all other tax purposes). A sells the FX stock in 2006 for $120. For purposes of applying section 1001, A must use its original basis of $50, with any adjustments under paragraph (d)(1) of this section, $10 in this case, and therefore A recognizes $60 of gain. Under paragraph (c)(2) of this section (which is applied using an adjusted basis of $110), $10 of such gain is treated as ordinary income. The remaining $50 of gain from the sale of the FX stock is long term capital gain because A held such stock for more than one year.


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## BBCWatcher (Dec 28, 2012)

Let me do some more research and see if I can anything. Thanks for helping me understand your situation better.


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## yalaki (Mar 29, 2016)

No, thank you for your input! They make this all unnecessarily complicated, I'm sure they could easily add a clause in the law to limit the requirements for newly arrived immigrants, especially those of us here on a NON-immigrant visa!


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