Mark-to-Market (MTM) Election for PFICs

Detailed Explanation

The mark-to-market election under IRC Section 1296 is the practical alternative to a QEF election when a Passive Foreign Investment Company will not provide an Annual Information Statement but its shares are publicly traded. Each year the shareholder compares the fair market value of the PFIC stock to its adjusted basis: if FMV exceeds basis, the excess is included as ordinary income even though nothing was sold; if basis exceeds FMV, an ordinary loss deduction is allowed but only to the extent of "unreversed inclusions," the cumulative net MTM income previously reported. Basis is adjusted up for inclusions and down for allowed deductions. On a later sale, gain is ordinary and loss is ordinary up to unreversed inclusions, with any excess loss treated as capital. The election is available only for "marketable stock," meaning stock regularly traded on a qualified national or foreign exchange (or shares of certain regulated investment companies), so it suits foreign exchange-traded funds and listed foreign holding companies but not unlisted foreign mutual funds. If the election is made after the first year of ownership, a coordination rule subjects the first year's mark to Section 1291 treatment to the extent allocable to prior years; electing in year one avoids this. The major trade-off versus QEF is that all MTM inclusions are ordinary income, with no long-term capital gain rates.