QEF election explained: How to use the Qualified Electing Fund for PFIC reporting

Written by  Reid Kopald, EA. Tax Manager

Last updated Dec 16, 2025

Before diving into a QEF election, it helps to see where the problem begins. Many US shareholders invest overseas and only later learn the IRS treats their fund as a PFIC. This happens when a foreign corporation earns 75% passive income or holds 50% passive assets, which brings in Form 8621 and the Section 1291 excess distribution rules.

Those rules add interest over time, turning what felt like a simple investment into a much larger tax bill. A QEF election offers another path by spreading income across years instead of piling it into one costly moment.

In this article from Taxes for Expats, you’ll see how these rules apply to the 2025 tax year (filed in 2026), using Form 8621.

Learn more about our services or contact us when you want reporting handled clearly, carefully, and on solid ground.

What is a QEF election?

A QEF election is a choice that changes how a foreign fund is taxed in the US, so the tax is based on what the fund earns each year instead of building up a much larger bill later.

A typical explanation is: a US shareholder, who buys a foreign mutual fund and holds it for many years – without this election, the IRS can later treat the profit as if it built up over time and add interest, but with a QEF election, the income is reported year by year, which helps prevent that backdated tax and interest.

This choice comes from Internal Revenue Code section 1295, which sets the rules for when the election can be made and how it stays in effect.

• The foreign fund must give out a PFIC Annual Information Statement or an approved Annual Intermediary Statement for each tax year, showing how much income and gain the fund made during that year.
• That statement gives each shareholder the numbers needed to report their share of the fund’s income on Form 8621, which is the IRS form used for QEF reporting.
• The fund can keep this treatment only as long as it follows the rules under section 1295, based on IRS regulations and official guidance.

Need clean PFIC reporting? See how TFX handles Form 8621 and QEF elections

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When should taxpayers consider a QEF election?

For the 2025 tax year, this often comes up with foreign mutual funds – offshore ETFs and similar investment companies – and the reporting is done on Form 8621 (Rev. 12-2025, posted 11/26/2025).

It works best for long-term investors, many US expats, and individuals with foreign portfolios, where each shareholder holding needs to be tracked year by year, clearly and consistently. A QEF election must be made by attaching Form 8621 to the return by the filing due date, including extensions, for the year the election begins, so timing and planning matter from the start.

Requirements for making a QEF election

A PFIC Annual Information Statement, often called an AIS, is what makes a QEF election work in real life. It gives the shareholder clear numbers that the IRS expects to see reported on Form 8621 for that tax year.

Required information (from the AIS):

• Your pro rata share of the fund’s ordinary earnings for the fund’s tax year, even when no cash is paid out
• Your share of the fund’s net capital gain for that same year, reported separately from ordinary income
• The cash paid or property treated as paid to you during the year, based on its fair market value at the time

NOTE! When a fund does not issue an AIS, the problems tend to snowball quickly.

• Form 8621 cannot be filled out with QEF numbers, which can cause the QEF election to fail for that year
• Missing statements increase audit risk because the IRS expects Forms 8621 and the supporting AIS to be kept with your records
• In limited cases, a protective statement may help preserve the chance to fix the issue later, including support for a retroactive election when facts allow

How the QEF election works

Think about a US expat who buys a foreign mutual fund and later learns that the fund reports PFIC information. Instead of facing a large tax bill years later, the investor chooses a steadier path. A QEF election allows the income to be reported each year on Form 8621, so the tax result is clearer and easier to manage.

The Qualified Electing Fund method is built on three simple ideas that repeat every year:

1. Income is reported each year – Ordinary earnings are reported as ordinary income, and net capital gains are reported as long-term capital gains under IRC section 1293. This happens even if the fund does not pay out cash.
2. Harsh default rules are avoided – Annual reporting replaces the excess distribution system that can push income back into earlier years and add interest charges.
3. Cost basis follows the income – Each year’s reported income increases the basis, and certain distributions reduce it, which helps prevent paying tax twice when the investment is sold.

Avoiding excess distribution tax rules with a QEF election

Under the default PFIC rules, certain payouts are treated as “excess distributions.” One common trigger is when a distribution for the year is more than 125% of the average distributions from the prior three years, as described in IRC section 1291. These rules can create tax that feels both delayed and inflated.

How QEF eliminates interest charges and lookback calculations

• Income is reported every year using Part III, lines 6a–7c of Form 8621 instead of being spread across earlier years.
• The excess distribution “lookback” method is generally not used once valid QEF reporting is in place.
• Interest charges tied to the default PFIC system are usually avoided for the years covered by the election.
• The focus shifts to keeping annual statements and filing accurate Form 8621 attachments.

Prior-year taint vs. current-year rules under a QEF election

When an election is made late, earlier years can still fall under the default PFIC rules even after QEF treatment begins.

How to make the QEF election on Form 8621

In Toso v. Commissioner (151 T.C. No. 4), the Tax Court showed what can happen when an investment falls into the default PFIC rules with no election in place.

The case is often cited because it makes one point clear: when the paperwork is missing or late, the tax result can be much harsher than expected.

That lesson is why the QEF election is handled carefully and on time. Form 8621 is the tool that connects the election to your US return and keeps the reporting on solid ground.

Step 1: Confirm that the fund can support QEF reporting. The fund, or the broker holding it, must provide a PFIC Annual Information Statement or an Annual Intermediary Statement with yearly figures.

Step 2: Identify the correct tax year at the top of Form 8621. The year must match the foreign fund’s reporting period used for the annual statement.

Step 3: Complete Part II of Form 8621 and check Box A (Election A) to treat the fund as a Qualified Electing Fund. This step links the election to that specific fund.

Step 4: Report annual income in Part III. Ordinary earnings go on lines 6a–6c, while net capital gain is reported on lines 7a–7c, using the numbers from the annual statement.

Step 5: Attach Form 8621 to the US return and file it by the due date, including any extensions that apply to the return.

Step 6: Keep copies of Form 8621, the annual statements, and supporting workpapers. The IRS expects the shareholder to maintain records for each year the election stays in effect.

The timing of the QEF election matters because the rules change depending on whether it is made in the first year of ownership or added later.

NOTE! When the election is made after the first year, extra steps may be needed to clean up the past. A purging election can do that – most often through a deemed sale election shown in Part II, Box D of Form 8621, or in some cases, mark-to-market treatment under Box C.

These elections reset how earlier years are treated, so future reporting under the QEF rules stays consistent and easier to manage.

Detailed Form 8621 instructions for a QEF election

This is based on the official IRS Instructions for Form 8621, so you can follow along with confidence without jumping back and forth to the IRS website.

1. Where to enter QEF income. For each tax year, QEF income is reported in Part III of Form 8621. Ordinary earnings go on lines 6a–6c, while net capital gain is reported on lines 7a–7c, with line 6c treated as ordinary income and line 7c flowing to Schedule D as long-term capital gain.
2. How to complete Part II (Income Inclusion). Part II is where the shareholder makes elections, including checking box A to treat the fund as a Qualified Electing Fund. Box B is different and applies only when the section 1294 option is used, which requires extra calculations on Part III lines 8a–9c. Boxes D and E are used when cleaning up prior years, with a deemed sale reported on line 15f and a deemed dividend reported on line 15e(2) when those elections apply.
3. Common errors on Form 8621. One frequent mistake is trying to make a retroactive election without meeting the IRS rules that allow it. A properly filed protective statement can help preserve that option, but only if it is attached to the return for the first year it applies.

Tax impact of making a QEF election

Once the paperwork is done, the QEF election is now in place. What follows is a clearer picture of how your 2025 tax year income flows onto the return you file in 2026, with fewer surprises later.

As a shareholder, you include your share of the fund’s yearly earnings as regular income on Form 8621, even when the fund does not pay cash. Capital gains reported by the fund are treated as long-term gains, which are usually taxed at lower rates.

Each year you report this income, your adjusted basis increases, and it drops when the fund makes distributions, helping prevent double taxation when you sell. In limited situations, a protective statement or even a retroactive election may come into play, but once the election is filed by the return due date, ongoing reporting becomes far more predictable.

QEF, MTM, or default PFIC regime – which method fits?

One investment can be reported three different ways, each leading to a very different tax result. The IRS looks at the fund’s year-end value – $0–50,000, $50,001–100,000, $100,001–150,000, $150,001–200,000, or over $200,000 – but the reporting method chosen shapes how income is taxed.

QEF election for US expats

A QEF election helps turn a confusing foreign investment into something you can report each year with more certainty on Form 8621. For the 2025 tax year, filed in 2026, this matters when a foreign fund feels ordinary but is treated very differently under US tax rules.

• Why foreign mutual funds (e.g., UK, EU, AU) are usually PFICs. Many are set up as foreign corporations, not US-regulated investment companies.
• How PFIC status is triggered. A fund generally falls under PFIC rules when 75% or more of its income is passive, or when 50% or more of its assets produce passive income such as dividends, interest, or capital gains.
• Why are US investors affected? Once those limits are met, every US shareholder in the fund must follow the PFIC reporting rules, even if the fund is treated as ordinary savings or retirement investing in its home country.
• Why expats often choose QEF or MTM elections. These elections replace the default PFIC method, which can apply higher tax and interest charges over time.
• Why timing and paperwork matter. Elections must be made by the return filing due date, including extensions, and missing the first year can mean relying on a retroactive election supported by a protective statement attached to the return.

Need assistance with your QEF election as a US expat shareholder?

Choosing the right PFIC election shapes how your foreign investments are taxed over time, and a QEF approach can bring steadier reporting and fewer surprises for long-term planning. When handled correctly, it helps a US shareholder align foreign fund income with US rules and avoid the harsher default PFIC treatment.

For peace of mind and clean reporting, it is wise to consult Taxes for Expats, who works with US expats and foreign investments every day.

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