Does day trading a Passive Foreign Investment Company (PFIC) unwittingly incur greater tax hassles and burdens with the IRS? Does anyone know?

[Glefdar]

Hi everyone, I have a question that seems fairly complicated but maybe the answer is pretty simple. I day traded the Chinese / Cayman Islands company ILAG for a nice gain during the last market session. Since it's an IPO, I received the prospectus from my broker via email. When I read through it (out of curiosity, I'm no longer holding), there was a section on PFIC tax rules. It was stated in the prospectus that there is a high chance the company will be classified as a Passive Foreign Investment Company for the current year, and that if this happens there are special tax implications from being a US holder of the stock. So what isn't clear to me is, have I created a potentially large tax hassle and tax bill from just holding ILAG for 20 minutes when I day traded it one time? It's unclear to me if I actually need to take special measures with how I file and pay taxes on this trade, or if I can just treat it as a regular short term capital gain like any other trade. It never occurred to me that it could create headaches or liabilities with the IRS to just scalp trade a foreign company's stock and it sounds incredibly stupid if true, given that day trading such a stock has nothing to do with "investment" lol.

It would also imply that as a day trader I would have to be constantly aware of whether a ticker is for a foreign or domestic company, when obviously I wouldn't know that a lot of the time when just playing technical setups off range and liquidity without knowing or caring what the company is like.

I have asked in a few discord channels and no one knows the answer. The really professional traders seem to less frequently trade this kind of garbage ticker (ILAG was running as a sympathy to MEGL; probably everyone that traded HKD or any of its sympathies needs an answer to this question), whereas the more amateur groups seem to be people who are not concerned with getting their taxes right. I was told to ask a CPA but I'm overseas for a few months and local CPAs won't know the answer to this. Would greatly appreciate if anyone can shed insight into this topic

 

[MerryDay]

it is not a big deal. File a 8621. pay tax on the capital gains as excess distribution at the highest rate on the tax table. Currently: 37%

 

[Glefdar]

it is not a big deal. File a 8621. pay tax on the capital gains as excess distribution at the highest rate on the tax table. Currently: 37%

Thanks for your response, this is very helpful! To clarify:

1) This particular trade would be taxed at 37% (or whatever the highest rate on the form 8621 table is) regardless of my current annual income tax bracket (e.g. even if I only net $10,000 of income and gains after capital losses are deducted, which would normally make my tax $0 since $12,000 is the minimum income tax threshold, I'd still be subject to the tax rate for this trade that is specified in form 8621), and regardless of how large the gain was (e.g. if it was a gain of $100, it would be a $37 tax), and

2) I'll be able to easily find out whether the company indeed was classified as a PFIC for 2022, because it will be reported in an SEC filing after the current year ends (I guess the Q1 10-Q, or its equivalent for foreign companies).

Are both of these points correct?

 

[MerryDay]

Thanks for your response, this is very helpful! To clarify:

1) This particular trade would be taxed at 37% (or whatever the highest rate on the form 8621 table is) regardless of my current annual income tax bracket (e.g. even if I only net $10,000 of income and gains after capital losses are deducted, which would normally make my tax $0 since $12,000 is the minimum income tax threshold, I'd still be subject to the tax rate for this trade that is specified in form 8621), and regardless of how large the gain was (e.g. if it was a gain of $100, it would be a $37 tax), and

2) I'll be able to easily find out whether the company indeed was classified as a PFIC for 2022, because it will be reported in an SEC filing after the current year ends (I guess the Q1 10-Q, or its equivalent for foreign companies).

Are both of these points correct?

1. yes
2. my brokers provides notification of status notifications on any assets that I have traded.

 

[Glefdar]

1. yes
2. my brokers provides notification of status notifications on any assets that I have traded.

According to this page:

De minimis exception: A PFIC shareholder is not required to complete the annual reporting requirement under IRC 1298(f) if the shareholder has not received any distribution or recognized gain and the aggregate value of all PFIC stock is less than $25,000 ($50,000 if married filing jointly).

Were you aware of this or does it accord with your knowledge? Maybe it doesn't come up for you because you're using larger sizing but wanted to add this to the thread in case it's accurate.

EDIT: The "De minimis exception" seems to imply that you might actually still need to file a reporting form even if you didn't have gains (or just had losses) if the sum of all your PFIC stock positions was >= $25k.