Under this method, you can elect to "mark-to-market" your gains at year-end when filing your tax return for the respective year. That means that at the end of the year, you pay tax on the difference between the fair market value of your shares at the beginning and at the end of the year. With this method, the gains and losses are also taxed as ordinary income, however, the interest accrual is minimized. In addition, you will be taxed at your actual tax rates instead of the maximum available tax rate.
In 2011 you purchased 10 shares in a foreign corporation which is considered to be a PFIC for $15 per share. At the end of the year (2011) the fair market value of the share was $17. You are filing as a single and you earn $40,000 per year, so your tax rate is 25%. Therefore, your gain from PFIC in 2011 was $20 ($17 at the end of the year - $15 at the beginning of the year or purchase multiply by the number of shares) on which you have to pay $5 of taxes.
At the end of 2012 the fair market value of the share is $16 which means that there are losses. However, your loss of $10 ($16 at the end of the year - $17 at the beginning of the year multiply by the number of shares) can be deducted as ordinary income.
You have sold your shares in 2013 for $19 per share. In addition, your income in 2013 was $90,000. Your gain from PFIC in 2013 was $30 ($19 at the end of the year - $16 at the beginning of the year multiply by the number of shares) and your tax rate is now 28%. Therefore, in 2013 you have to pay $8.40 taxes on your gain from the PFIC.
Please note that if you wish to apply the mart-to-market method, the IRS requires you to make this election on the tax return for the year you buy the fund (inception date).
OnestopTaxPrep has over 18 years of specialization in providing combined Dutch and U.S. tax preparation and consulting services. This specialization has assisted U.S. nationals living and / or working in The Netherlands and Dutch nationals living in the U.S.A.