When PFIC Taint Exists

A PFIC is considered “tainted” if the taxpayer:

• held the PFIC in one or more years without a valid QEF or MTM election, and
• accumulated unrealized gains or distributions under §1291 rules.

Once tainted, any future gain or excess distribution will trigger:

• look-back allocation across prior holding years,
• historic top U.S. marginal tax rates, and
• daily §6621 interest.

To move into MTM or QEF on a clean basis, that §1291 exposure has to be settled first — this is what practitioners refer to as purging the PFIC taint.

Deemed Sale vs Deemed Distribution

Deemed Sale Election (Most Common)

Authority: IRC §1291(d)(2); Treas. Reg. §1.1291-10

The PFIC is treated as fully sold at fair market value (FMV) on a specified purge date:

Deemed Sale Gain = FMV − Adjusted Basis (FIFO required)

• the gain is taxed under §1291 excess-distribution rules,
• §6621 interest applies,
• the new basis becomes FMV, and
• the holding period resets.

This method is widely used for transitions into MTM and is usually also the practical choice for QEF when a QEF statement exists but a deemed distribution is not desirable.

Deemed Distribution Election (QEF Only, Not Implemented in pfic.xyz)

Authority: Treas. Reg. §1.1291-9

Here, the PFIC is not treated as sold. Instead, it is treated as distributing its post-1986 undistributed earnings:

• the deemed distribution is taxed as ordinary income,
• the stock basis increases, and
• the holding period continues.

This approach is only available if the PFIC provides a valid QEF Annual Information Statement and detailed earnings data. It is uncommon in typical brokerage PFIC settings. For clarity, pfic.xyz does not implement the deemed distribution path; it focuses on the deemed sale + MTM workflow.

Correct Timing of the §1291 Purge in the First MTM Year

For MTM transitions, timing is often misunderstood. When a taxpayer first elects MTM after prior §1291 years:

• the deemed sale generally occurs on the last day of the first MTM election year, and
• the resulting gain is treated as a §1291 excess distribution on that same year’s Form 8621.

Example:

• 2017–2021: PFIC under §1291 rules (no QEF, no MTM)
• 2022: first year in which the taxpayer elects MTM
• → deemed sale date = December 31, 2022
• → the 2022 deemed sale gain is processed under §1291, not §1296(a)
• → tax and interest are reported on the 2022 Form 8621

Form 8621 – Part V vs Part IV

In the first MTM year where §1291 taint exists, Form 8621 is completed as follows for the relevant PFIC:

• Part II: check Box C (MTM election under §1296);
• Part V: required — the deemed sale gain (and any §1291-type distributions in that year) are computed as a §1291 excess distribution and allocated to prior years;
• Part IV: the deemed sale gain is generally not reported again here, to avoid double counting. Under §1296(j), that year’s MTM-type gain is effectively “redirected” into §1291.

Starting with the second MTM year, once the PFIC has a clean, FMV-based basis and no remaining taint, annual MTM adjustments are reported solely in Part IV under §1296(a)/(d), with no further use of Part V unless a new §1291 situation arises.

How to Implement the Purge with pfic.xyz

pfic.xyz does not silently guess or auto-create deemed-sale entries. Instead, it expects the professional to explicitly model the deemed sale and the new MTM basis using two separate calculations.

Step 1 – Deemed Sale for the §1291 Purge

Example — Deemed Sale Entry Added for §1291 Purge

Step 2 – Create the Clean MTM Opening Basis

Common Errors & Documentation

Frequent Errors Seen in Practice

• treating the purge as occurring on the prior year’s 12/31 instead of the MTM election year-end;
• reporting the same deemed sale gain in both Part IV and Part V;
• using average cost rather than FIFO for §1291 calculations;
• purging only a portion of the PFIC shares instead of the entire holding;
• omitting a written election statement for the deemed sale;
• failing to maintain §6621 interest schedules and year-by-year allocation workpapers.

Recommended Workpapers

For MTM transitions with a §1291 purge, practitioners should retain at least:

• FMV source documentation and valuation methodology;
• FIFO cost basis reconciliation and LOT detail;
• excess-distribution allocation tables for the deemed sale year;
• historic rate and §6621 interest calculations;
• a short Form 8621 completion memo plus the deemed sale election statement.

Related Articles

Further reading on PFIC mechanics and workpapers:

• How to Calculate PFIC MTM (§1296) in Excel – Essential for your next step after the purge.
• PFIC §1291 Calculation Explained – Deep dive into the excess distribution logic used for the deemed sale.
• Audit-Ready PFIC Form 8621 Workpapers – How to document your calculations for the IRS.

Professional Disclaimer

This article is for educational and workflow-design purposes only. It summarizes PFIC concepts based on publicly available IRS materials and Hans’s own calculator development experience. It is not tax, accounting, or legal advice for any specific taxpayer. PFIC outcomes depend on complete transaction histories, filing posture, and individual circumstances. Taxpayers should consult a qualified EA or CPA before filing.