🤯 PFIC Complexity Drivers: Why Dividend Reinvestments and Partial Sales Explode the Workload

A focused look at the two “small” transaction types that quietly turn PFIC Form 8621 into an engineering problem: dividend reinvestments and partial dispositions.

At first glance, a PFIC position can look harmless: a modest balance, held for years, with regular dividends and the occasional sale. But from a compliance standpoint, two transaction types do most of the damage:

• Dividend reinvestments – every “DRIP” creates new lots and new §1291 events.
• Partial sales – every “I only sold some” forces strict FIFO and lot consumption.

These are the main reasons why “simple” PFICs routinely defeat Excel templates and consume disproportionate professional time.

1️⃣ Dividend Reinvestments: One Click, Two Problems

From a taxpayer’s perspective, dividend reinvestment feels trivial: “I never even saw the cash, it just bought more units.”
From a PFIC engine’s perspective, each reinvestment is two separate legal events.

Problem #1 – Every Reinvestment Is a §1291 Distribution

• A reinvested dividend is still a distribution under IRC §1291. It must be tested against the 125% excess distribution threshold, even if the dollar amount looks tiny.
• If part of that distribution is “excess”, the excess amount must be:
  • allocated across prior holding years, and
  • charged with penalty interest year-by-year under §6621.

There is no “too small to matter” exception in the statute. Once a distribution occurs, Form 8621 filing is mandatory as soon as there is a distribution or disposition — regardless of the account size.

Problem #2 – Every Reinvestment Creates a New PFIC Lot

• The reinvested amount buys new PFIC shares.
• This is treated as a new lot, with its own:
  • acquisition date
  • original basis (in foreign currency and USD)
  • holding period
  • future §1291 / MTM behaviour

Over time, reinvestments cause lot proliferation:

10 years × 12 monthly reinvestments = 120+ independent lots
→ each one must be tracked until final disposition.

Every one of those lots has to “know” what happened to it in every future year: was it still held, partially sold, fully sold, or swept into an MTM regime?

2️⃣ Partial Sales: The FIFO Enforcement Engine

If reinvestments create the data explosion, partial sales are the trigger that forces the engine to deal with that explosion in the most painful way: strict FIFO.

Legal Default – FIFO, Unless You Can Prove Otherwise

The law is clear. Unless the taxpayer can provide timely, specific identification of which shares were sold, the default rule is:

First-In, First-Out (FIFO)
Treas. Reg. §1.1012-1(c), reinforced in IRS Pub. 550

In practice, almost no PFIC investor keeps documentation precise enough to support specific identification. So, for almost all real-world PFIC cases, the engine must:

• take units out of the oldest lots first,
• often depleting multiple lots in a single sale, and
• update the remaining units and basis in each affected lot.

Every Partial Sale Changes the Future

A partial sale is not just “some units sold this year.” Mechanically, it:

• reduces the units in several historical lots,
• consumes each lot’s Adjusted Basis (AAB),
• may consume some or all of a lot’s Unreversed Inclusions (UNI), and
• changes the starting point for every future §1291 or §1296 calculation.

A single misallocation in a partial sale doesn’t just distort this year’s gain—it corrupts the entire chain of AAB/UNI going forward. That’s why partial dispositions are usually the point where “quick Excel” solutions quietly fail.

3️⃣ Why So Many Professionals Recommend a Full Exit

When a client decides to get out of PFICs, many experienced EA/CPA firms quietly recommend a clean, single-year exit instead of staged partial sales.

One year of pain is easier than ten years of complexity.

A full disposition:

• avoids ongoing FIFO inventory problems,
• avoids multi-lot, multi-year recomputation,
• collapses the math into one final gain/loss event, and
• cuts off future §1291 / MTM complexity for that PFIC.

By contrast, partial exits keep all the moving parts alive: more lots, more FIFO matches, more AAB/UNI states to carry forward year after year.

4️⃣ Why Excel Struggles — and When to Use a Dedicated Engine

From a systems perspective, PFIC with reinvestments and partial sales is not “just a spreadsheet.” It is a stateful inventory and tax engine:

• it must remember every lot’s basis, units and UNI each year,
• it must apply FIFO correctly every time units are sold,
• it must run §1291 or MTM on evolving positions, and
• it must produce audit-grade, traceable workpapers.

That’s exactly where most hand-built Excel models break:

• a small layout change breaks all downstream formulas,
• adding a new PFIC lot manually is error-prone,
• partial sale logic becomes unreadable very quickly.

A dedicated engine like pfic.xyz is designed specifically to:

• track lots and FIFO consumption deterministically,
• apply §1291 and §1296 rules consistently, and
• generate workpapers detailed enough for IRS review.

Automation cannot clean bad broker data or choose transaction types for you—but it can remove the mechanical burden of running the PFIC state machine once that data is correctly structured.

✅ Key Takeaways

• Dividend reinvestments are two events: a taxable distribution and a new lot.
• Partial sales enforce strict FIFO and change the tax state of every affected lot.
• Both are major workload multipliers, even for “small” PFIC balances.
• Complexity is driven by events and years, not by account value.

Understanding these two drivers is essential for setting realistic expectations about PFIC fees, choosing an exit strategy, and deciding when a dedicated PFIC engine is no longer optional.