What Is a QEF Election and How Does It Reduce My PFIC Tax?

A Qualified Electing Fund (QEF) election under IRC Section 1295 lets you include your share of a PFIC‘s ordinary earnings and net capital gains on your U.S. return each year, even if no distribution is made. This avoids the default Section 1291 regime, which imposes the highest ordinary income tax rate plus compounding interest on excess distributions and sale gains.

How the QEF election works:

• Annual inclusion: You report your pro-rata share of the fund’s ordinary income and net capital gains each year on Form 8621
• Capital gains rate preserved: The net capital gain portion qualifies for preferential long-term capital gains rates (0%, 15%, or 20%)
• No interest charge: Because income is recognized annually, the punitive Section 1291 interest charge does not apply
• Basis increases: Your basis in the PFIC increases by the amounts you include each year

Requirements to make a valid QEF election:

• PFIC Annual Information Statement (AIS): The fund must provide this document, or you must obtain equivalent data from the fund’s financial statements
• Timing: Ideally elected in the first year you hold the PFIC. If elected after year one, a “purging election” under Section 1291(d)(2) may be needed to clear prior-year Section 1291 taint
• Filed with Form 8621: Attach to your timely filed return (including extensions)

If you hold foreign mutual funds or ETFs classified as PFICs, the QEF election is typically the most favorable tax treatment available, provided the fund supplies the necessary data. For the PFIC election strategy, see our PFIC Reporting Guide.