Do Chinese mutual funds, wealth products and Hong Kong ETFs go on Form 8621? How PFIC tax works and how to keep it down

A PFIC (passive foreign investment company) is a foreign corporation that meets either the income test or the asset test: 75% or more of its gross income for the year is passive, or at least 50% of its assets, on average, produce passive income. Interest, dividends and gains on securities are all passive, so foreign investment vehicles like funds and wealth products are almost always PFICs.

The PFIC rules were added in 1986 to stop U.S. investors from parking money in foreign funds that never pay out and never get taxed. They target foreign investment vehicles regardless of how much you put in or whether you paid tax in China.

• Income test (75%): 75% or more of the foreign corporation's gross income for the year is passive income, such as interest, dividends, certain rents and royalties, and gains from selling securities.
• Asset test (50%): on average over the year, at least 50% of its assets produce passive income or are held to produce it, such as cash, stocks and bonds.
• Treated as a corporation: most Chinese public funds are contractual funds, not companies under Chinese law. Under the U.S. entity classification rules, though, foreign investment funds are generally treated as foreign corporations in practice, which brings them under the PFIC rules.
• How you bought it doesn't matter: shares bought through a bank app, Alipay, a broker or the fund company directly are all held by you. Funds held indirectly through a foreign company or partnership can be reportable too.
• U.S. tax residence is the trigger: the PFIC rules apply to U.S. persons, meaning U.S. citizens, green card holders, people who are U.S. tax residents under the substantial presence test, and U.S. companies, partnerships and trusts.

Which common Chinese investments are likely PFICs?

As a rule of thumb, shares of an operating company, deposits and government bonds you hold directly usually aren't PFICs. Money handed to a foreign pool to invest usually is. For any specific product, check the offering documents and its legal structure.

There are three ways a PFIC can be taxed: the default section 1291 excess distribution rules, a QEF election, or a mark-to-market (MTM) election. If you do nothing, section 1291 applies automatically, and it's the most expensive, with an interest charge on top. QEF needs the fund's cooperation, which Chinese funds rarely give. MTM is the usual alternative: you report the yearly change in value as ordinary income.

Description: The three regimes side by side, compared on when tax is due, the rate, and what you need to use them.

Item	Section 1291 excess distribution (default)	QEF election	Mark-to-market (MTM) election
When tax is due	When you get an excess distribution or sell	Every year on your share of the fund's earnings, distributed or not	Every year on the year-end value, sold or not
Rate	Current-year piece as ordinary income; earlier-year pieces at each year's top rate (37% for individuals)	Ordinary earnings as ordinary income; net capital gain at capital gain rates	Ordinary income
Interest charge	Yes, from each earlier year	No (unless you elect to defer the tax)	No
Losses	A loss on sale is a capital loss, with the usual limits	Normal rules	Deductible only up to prior net MTM inclusions
Requirement	Nothing; it applies by default	The fund provides a PFIC Annual Information Statement every year	The shares are "marketable stock": regularly traded on a qualified exchange, or a qualifying public fund
Chinese funds	The default	Statements almost never available	Listed ETFs usually qualify; mutual funds need a fund-by-fund check
How to elect	No election	Timely election in Part II of Form 8621	Timely election in Part II of Form 8621

How does the section 1291 excess distribution calculation work?

An excess distribution is either the part of this year's distributions that exceeds 125% of the average distributions of the prior 3 years, or the entire gain when you sell PFIC shares. It's spread evenly, day by day, over your holding period. The pieces allocated to this year and to pre-PFIC years are ordinary income. The pieces allocated to earlier PFIC years are taxed at that year's top rate, plus interest from that year forward.

• No excess distribution in the first year: distributions received in the first year you hold the shares aren't excess distributions and are taxed as ordinary dividends. That relief doesn't apply to gain on a sale.
• The 125% comparison: compare this year's distributions with the average of the prior 3 years (or fewer, if you've held the shares less than 3 years). Anything over 125% is an excess distribution. Reinvested dividends count as distributions.
• All sale gain is excess: gain on selling or redeeming a PFIC is entirely an excess distribution, with no long-term capital gain rates. A loss on sale can't be spread this way and is generally a capital loss.
• The rate for earlier years: not your actual bracket, but the top individual rate for that year (37% since 2018).
• Interest: runs from each earlier year's return due date at the IRS underpayment rate, compounded daily, through this year's due date.
• Shares bought before you became a U.S. tax resident: the holding period rules are different, and the calculation depends on the purchase date and your residency start date.

Example (hypothetical numbers, to show the method): Ms. Zhang is a green card holder and a U.S. tax resident all year. On January 1, 2023 she buys a Chinese equity mutual fund with RMB worth $30,000 that day. The fund pays nothing, and on December 31, 2025 she redeems it for RMB worth $45,000. Her gain is $15,000, and with no election, section 1291 applies.

If this were a U.S. fund, the same $15,000 would be a long-term capital gain taxed at 15%, about $2,250. The difference is the price of "top rate plus interest." The longer you hold and the more the fund grows, the wider the gap.

How does mark-to-market work?

With an MTM election, each year you report the difference between the year-end value and your adjusted basis as ordinary income. If the value drops, the loss is deductible only up to the MTM income you've already reported in earlier years. There's no interest and no spreading, but you pay tax even if you don't sell, and the income is ordinary.

Example (hypothetical numbers, to show the method): the same fund, but Ms. Zhang makes the MTM election for 2023, the year she buys it:

She reports the same $15,000 over three years, but at her actual rate each year, with no forced 37% rate and no interest. If the fund had fallen to $32,000 at the end of 2024 instead, she'd report a $2,000 ordinary loss (within the $4,000 already included for 2023) and her basis would drop to $32,000. If it had fallen to $28,000, a $6,000 paper loss, she could deduct only $4,000.

• Elect for the year you want it: make the MTM election on Form 8621 by the due date (including extensions) of that year's return. Late elections are generally not allowed, with very limited exceptions.
• Electing after several years: if you've held the fund for years before electing MTM, section 1291 still applies to the built-up gain in the first MTM year, and MTM applies after that.
• Why QEF is rare: a QEF election needs an annual statement from the fund showing your share of ordinary earnings and net capital gain. Chinese fund companies generally don't provide one, so in practice it's rarely an option.

A U.S. person who holds a PFIC generally files one Form 8621 per PFIC per year, attached to the 1040 by its due date, including extensions. If all your PFICs total $25,000 or less at year-end ($50,000 on a joint return), and this fund had no excess distribution, no gain on a sale and no election, you don't have to file for it.

The IRS instructions list five situations that require the form:

• Distributions: you received a direct or indirect distribution from the PFIC.
• Gain on a sale: you recognized gain on a direct or indirect disposition of PFIC shares.
• QEF or MTM reporting: if a QEF or MTM election is in effect, you report the year's inclusion, regardless of value.
• Elections: you're making a QEF, MTM or other election in Part II this year.
• Annual report: the section 1298(f) annual report. Simply holding the fund with nothing happening falls here, and this is where the exception applies.

How the exception works:

• Measured at year-end: on the last day of the tax year, add up the value of all PFIC shares you own directly or indirectly (including MTM and QEF shares). The total must be $25,000 or less, or $50,000 for a joint return.
• Section 1291 funds only: the fund in question had no excess distribution and no gain on a sale this year. A fund you sold at a gain, or that made an excess distribution, has to be reported no matter how small.
• A separate $5,000 test for indirect holdings: for a section 1291 fund you hold indirectly through another foreign corporation, no form is needed if your proportionate share is worth $5,000 or less at year-end and there was no excess distribution or gain.
• One form per fund: 10 funds that all need reporting means 10 Forms 8621. If you bought many funds across several apps, the form count adds up fast.
• No Form 8621 doesn't mean nothing to report: dividends and gains are still taxable, and the accounts still count toward the FBAR and Form 8938 thresholds (on Form 8938, assets already reported on Form 8621 can be listed in summary).

Description: Read from the top and follow the first row that fits.

What happened this year	File Form 8621?	How it's taxed
An MTM or QEF election is in effect (made this year or earlier)	Yes	MTM or QEF inclusion
You sold or redeemed shares at a gain	Yes, regardless of value	Section 1291: the whole gain is an excess distribution
You received distributions over 125% of the prior 3-year average	Yes, regardless of value	The excess under section 1291, the rest as ordinary dividends
You received distributions under 125% (or in your first year)	Generally yes	Taxed as ordinary dividends
Nothing happened, and all your PFICs total more than $25,000 at year-end ($50,000 joint)	Yes (annual report)	No tax this year
Nothing happened, and all your PFICs total $25,000 or less at year-end ($50,000 joint)	No	No tax this year

Form 8621 doesn't carry a fixed dollar penalty like Form 8938, but the real risk is the statute of limitations. If a required Form 8621 isn't filed, the assessment period for the whole return doesn't start running until you file it, and then runs 3 more years. The IRS can adjust any item on that return, not just the PFIC.

• The rule: under IRC section 6501(c)(8), if information required under section 1298(f) isn't furnished, the assessment period for the related return doesn't end until 3 years after the information is provided.
• With reasonable cause: if you can show reasonable cause and not willful neglect, the extension applies only to the items related to the PFIC, not the whole return.
• Unreported gains still owe tax: if you sold funds or received distributions in earlier years and didn't apply the PFIC rules, catching up means recomputing the tax and interest under section 1291.
• Related forms: the same assets usually involve the FBAR (see the guide at yclcpa.com/fbar) and Form 8938 (see the guide at yclcpa.com/8938), each with its own penalties.

Form 8621 needs each fund's purchases, distributions, sales and year-end value, all converted to dollars. Most of it sits in Chinese bank, Alipay, broker or fund company apps. Export last year's history early each year instead of digging for it when you need to catch up.

• Alipay and bank app history: most let you export a year of transactions or request an electronic statement. If not, a bank branch can print a stamped transaction history and holdings certificate.
• NAVs are public: funds publish NAV daily, so the year-end NAV is available from the fund company's website or public sources; multiply by your units.
• Be consistent with exchange rates: basis and sale proceeds generally use the rate on the transaction date, and year-end values use the year-end rate. Use the same method every year and keep the source.
• Many small funds: sort by year-end value first and see whether your total passes $25,000 before deciding which funds need a form this year.

The best planning happens before PFICs become a problem: sell before you become a U.S. tax resident, or switch to assets that aren't PFICs. For funds you already own, make a timely MTM election where you can, so the top-rate-plus-interest charge under section 1291 doesn't keep growing.

• Before you move or get a green card: gains on Chinese funds and wealth products you sell before becoming a U.S. tax resident aren't subject to U.S. tax. If you plan to stay long-term, review your holdings with a CPA before your status changes.
• Hold assets that aren't PFICs: Chinese deposits, large CDs, structured deposits, government bonds and individual stocks held directly generally aren't PFICs. For exposure to China, consider U.S.-registered China ETFs through a U.S. broker, reported on Form 1099 as usual.
• Elect MTM early: listed ETFs are generally marketable stock. Chinese open-end public funds can also count as marketable stock if they meet the IRS conditions (more than 100 shareholders, offered to the public at NAV with no minimum above $10,000, NAV published at least weekly, annual independently audited financial statements, government supervision and others). Elect in the year you buy and report ordinary income each year after that, with no interest charge.
• Funds held for years under section 1291: consider a deemed sale "purging" election to clean up the past in one year and then move to MTM. Run the numbers before deciding.
• Small holdings: if all your PFICs stay at or under $25,000 at year-end ($50,000 joint) and you don't redeem, you can skip the annual Form 8621. In the year you redeem, you still file and section 1291 still applies.
• Spouses and family: a fund is a PFIC of whoever it's registered to. If your parents bought a fund in your name, it's yours.

Start with what you hold, when you became a U.S. tax resident, and whether you've ever sold or received distributions. Then find your situation below.

• Situation A: you haven't moved to the U.S. or gotten a green card yet, and you hold Chinese funds or wealth products. Review your holdings with a CPA before your status changes. Selling, switching to deposits or individual stocks, or planning an MTM election for your first U.S. year are all worth weighing.
• Situation B: you're already a U.S. tax resident, bought recently and are holding. Make a timely MTM election where the fund qualifies. Where it doesn't, plan when to redeem and confirm each year whether you need to file Form 8621.
• Situation C: you never filed Form 8621, but never sold and never received distributions. No tax was missed, only an information return. File it with a Form 1040-X under the Delinquent International Information Return Submission Procedures (DIIRSP), with a reasonable cause statement (see the guide at yclcpa.com/diirsp).
• Situation D: you sold funds or received distributions in earlier years and didn't report them, or didn't apply the PFIC rules. That's unreported income, and the tax and interest need to be recomputed under section 1291. If it was non-willful, the streamlined procedures are usually the place to look (see the guide at yclcpa.com/sfop).
• Situation E: you hold investment-linked or universal life policies, private funds, or complicated wealth products. Get the policy terms and offering documents first, decide whether there's a PFIC and who owns it, then decide how to report. Don't assume it's exempt.