How to Calculate PFIC MTM (§1296) in Excel — Lot-Level Engine and Common Errors

This guide shows how to build a lot-level, audit-ready PFIC MTM (§1296) engine in Excel, starting from the most common real-world errors and then reconstructing the legally correct mark-to-market state machine for Form 8621 Part IV.

1 — Common PFIC MTM Errors in Practice

The following PFIC MTM errors appear again and again in practitioner forums and ad hoc Excel workpapers. All of them share one root cause: they ignore the lot-level state machine required by §1296 and Treas. Reg. §1.1296-1.

1.1 Error: “MTM = FMV at Year-End − FMV at Start of Year”

Many spreadsheets compute the annual MTM adjustment as:

MTM = FMV(12/31 current year) − FMV(12/31 prior year)

This treats MTM as a simple account-level FMV delta from one year-end to the next. It is easy to implement, but it is not how Section 1296 works.

1.2 Error: “I Can Optimize MTM by Choosing Which Lot to Sell First”

A very common planning idea goes like this:

• Low-basis lots often have large historic MTM inclusions → large UNI.
• Higher-basis lots may later generate MTM losses.
• Therefore: “I will sell the low-basis lots first so that future MTM losses can be absorbed by the big UNI balance.”

This assumes that UNI is a global ordinary-loss pool that can be used across all lots.

1.3 Error: Global UNI Pool for the Entire PFIC Position

Another frequent pattern is to maintain one “cumulative UNI” number for the entire PFIC position and compare the year’s MTM loss to that global amount:

• If loss ≤ global UNI → classify as ordinary loss.
• Excess over global UNI → classify as capital loss or ignore.

This treats UNI as fungible across lots, which the regulations do not permit.

2 — What §1296 Actually Requires (and Why Those Errors Fail)

To see why the three errors above are structurally wrong, you have to read the statute and regulations the way an examining agent would.

2.1 MTM Inclusion Is FMV − Adjusted Basis (Not FMV − FMV)

26 U.S.C. §1296(a) requires a U.S. shareholder with a valid MTM election for marketable PFIC stock to:

• Include in gross income the excess of the fair market value of the stock at year-end over its adjusted basis, and
• Is allowed a deduction for the excess of adjusted basis over year-end FMV, but only to the extent of unreversed inclusions with respect to such stock.

Treas. Reg. §1.1296-1(a) implements this rule explicitly as:

MTM inclusion = fair market value at the close of the taxable year minus the adjusted basis of the share.

Adjusted basis is recalculated every year: it increases by prior MTM inclusions and decreases by allowed MTM losses. Any Excel model that uses FMV(current) − FMV(prior) is ignoring those basis adjustments and will be wrong from year two onward.

Error 1.1 fails because §1296 and Treas. Reg. §1.1296-1 require a comparison to adjusted basis, not prior-year FMV.

2.2 UNI and Loss Limitation Are Lot-Specific, Not Global

The loss limitation and the definition of “unreversed inclusions” (UNI) appear in Treas. Reg. §1.1296-1(c)(3):

A loss for the taxable year with respect to any section 1296 stock is allowed only to the extent of the unreversed inclusions with respect to such stock.

The regulation then defines UNI for a specific item of Section 1296 stock as the excess of cumulative MTM inclusions over cumulative allowed MTM losses for that stock.

In short:

• UNI is calculated with respect to a particular lot of PFIC MTM stock.
• The MTM loss limitation is tied to the same lot that generated the UNI.

Treas. Reg. §1.1296-1(c)(5) then makes the lot-level nature explicit by requiring that unreversed inclusions be tracked on a share-by-share basis.

Errors 1.2 and 1.3 fail because UNI is lot-specific. There is no legal concept of a “global UNI pool” that you can use to absorb losses on other lots.

2.3 No “Disposition Order Optimization” Under §1296

Dispositions are addressed by Treas. Reg. §1.1296-1(c)(4). In simplified terms:

• Disposition gain is ordinary income only up to that lot’s UNI (ordinary recapture).
• Any gain in excess of UNI is capital gain.
• Disposition losses are capital losses, not ordinary MTM losses.

Because UNI and recapture are tied to the same lot:

• Selling a low-basis, high-UNI lot does not “free up” ordinary loss capacity for other lots.
• Changing the order in which you sell different lots cannot change which losses are MTM-ordinary versus capital.

Under §1296, there is no legally valid strategy that “optimizes MTM” by cherry-picking which lot to sell first. Any such strategy assumes a global UNI pool that does not exist in the regulations.

For audit purposes, the least controversial approach is to fix a neutral lot-identification convention and stick to it. In practice, that usually means FIFO. The MTM engine at pfic.xyz uses FIFO as its default lot-identification method in MTM mode, precisely because it is conservative, transparent, and easy to review.

3 — From Statute to Spreadsheet: The Lot-Level MTM State Machine

Once you read §1296 and Treas. Reg. §1.1296-1 as a state machine instead of a one-year formula, the Excel requirements become straightforward. A compliant PFIC MTM model must:

• Track adjusted basis per lot, year by year.
• Track UNI per lot, year by year.
• Track shares/units per lot, year by year.
• Link each year to the previous year (“beginning-of-year” equals prior “end-of-year”).

3.1 Required Lot-Level Fields per Year

For each PFIC lot and each tax year, the Excel engine must maintain at least these fields:

• Lot ID – unique identifier for the acquisition lot.
• Opening units – units outstanding at the start of the year (after prior dispositions).
• Opening adjusted basis (AAB BOY) – basis after prior years’ MTM inclusions and allowed losses.
• Opening UNI – unreversed inclusions at the start of the year for that lot.
• Units sold during the year – matched using FIFO or a consistent lot-identification method.
• Sale proceeds and basis consumed – used to compute realized gain, split into ordinary recapture and capital.
• Year-end units – units remaining in the lot at 12/31.
• Year-end FMV (USD) – fair market value of the remaining units at year-end.
• Raw MTM change – FMV(EOY) − AAB(BOY) for the lot.
• Allowed MTM loss – if Raw MTM is negative, limited by that lot’s UNI(BOY).
• MTM ordinary income inclusion – if Raw MTM is positive, or the allowed loss is less than the Raw MTM loss.
• Adjusted basis (EOY) – AAB(BOY) + MTM gain − allowed MTM loss.
• UNI (EOY) – UNI(BOY) + MTM gain − allowed MTM loss.

3.2 The Yearly Flow per Lot

In Excel, each lot follows the same deterministic flow for every year:

1. Roll forward opening state from the prior year’s EOY values for AAB, UNI, and units.
2. Apply dispositions during the year, splitting realized gain between ordinary recapture (up to UNI) and capital.
3. Compute year-end FMV for remaining units in that lot.
4. Compute Raw MTM = FMV(EOY) − AAB(BOY).
5. Apply loss limitation: allowed MTM loss cannot exceed that lot’s UNI(BOY).
6. Update AAB and UNI using MTM gain and allowed MTM loss.
7. Carry AAB(EOY), UNI(EOY), and units(EOY) into the next year as the opening state.

Any model that does not maintain this chain (for example, by recreating MTM “from scratch” each year) breaks the §1296 mechanics and is extremely difficult to defend under examination.

4 — Example: Lot-Level Excel MTM State Table (Single Year)

The table below shows a minimal, audit-ready layout for one tax year. Each row is one PFIC lot. Additional years are added as extra rows (e.g., “2025 …” columns). Opening values are pulled from the prior year’s ending values for the same lot.

This single row shows how the state machine works:

• Opening basis, UNI, and units are carried over from the prior year’s ending values.
• No 2024 dispositions occur, so the only driver of ordinary income is the MTM adjustment.
• Adjusted basis at year-end increases by the MTM gain, as required by §1296(a).
• Because no MTM loss is allowed, UNI at year-end increases by exactly the MTM gain.

New lots (e.g., later purchases or DRIP reinvestments) appear as new rows with their own basis and UNI histories. Additional years are appended as additional rows, and formulas roll forward opening values from the prior year’s ending values per lot.

5 — Excel vs. a Dedicated MTM Engine

For a small number of lots and a simple holding pattern, a carefully built Excel file can implement the lot-level MTM state machine that §1296 and Treas. Reg. §1.1296-1 require. But as the number of PFIC lots, years, brokers, and partial dispositions grows, Excel effectively turns into a long-lived valuation engine with basis, UNI, FX and FIFO logic that must remain correct for 10–20 years.

The pfic.xyz calculator implements the same lot-level mechanics described in this article:

• Per-lot MTM basis and UNI roll-forward across the entire holding period.
• FIFO-based disposition mapping as a conservative, reviewable convention.
• Workpapers aligned with Instructions for Form 8621, especially Part IV.