Each year, U.S. taxpayers must report each PFIC on a separate IRS Form 8621. On this form, taxpayers may make the mark-to market election or the "Qualified Electing Fund" (QEF) election. There are also various supplementary elections that are beyond the scope of these materials. Annual IRS Form 8621 reporting is required for each PFIC that is directly or indirectly held by the investor, regardless of which election is made.
Under the mark-to-market election, investors report all income and gains (both realized and unrealized) each year. The total amount is taxed as regular income. Under this election, capital gains do not receive favoured tax treatment.
Under the QEF election, investors report their pro-rata share of the fund's earned income for U.S. tax purposes. The QEF election allows investors to defer taxes on unrealized capital gains and to receive more favourable tax treatment on their share of capital gains which were realized within the fund. Investors also receive an increase to their book cost in units of the funds, to correspond with amounts included in income under the QEF election.
The QEF election is frequently advantageous because it allows for more tax-efficient treatment of capital gains.