What Is a QEF Election?
A QEF Election is a US tax election under which a passive foreign investment company shareholder reports pro rata fund earnings annually.
Also known as: Qualified Electing Fund Election, Section 1295 Election.
How QEF Election works
A QEF Election, made under section 1295(b) of the Internal Revenue Code, allows a US shareholder of a passive foreign investment company (PFIC) to treat the fund as a qualified electing fund, so the shareholder annually includes a pro rata share of ordinary earnings as ordinary income and of net capital gain as long-term capital gain. The election requires the PFIC to provide a PFIC Annual Information Statement, which many non-US funds do not issue. The election is generally due by the due date, including extensions, of the return for the first tax year to which the election applies, and late retroactive elections require a protective statement or IRS consent. Otherwise, PFIC gains generally fall under the excess distribution regime.
QEF Election vs Mark-to-Market Election
Unlike a mark-to-market election, which taxes annual changes in the market value of marketable PFIC stock, a QEF Election taxes the shareholder's share of the fund's actual earnings and gains, whether or not distributed.
Example
Illustrative example: A US citizen living in Country A holds units in a Country A investment fund classified as a PFIC. If the fund issues a PFIC Annual Information Statement and the citizen makes a timely QEF Election, the citizen reports a pro rata share of the fund's ordinary earnings and net capital gain each year on Form 8621, even without any distribution.
Common misconception
Myth: Holding a foreign fund through a local bank or brokerage removes US PFIC reporting.
Reality: US persons holding non-US funds generally remain subject to PFIC rules and Form 8621 reporting, and a QEF Election requires the fund's annual information.
Frequently asked questions
What is a QEF election for a PFIC?
A QEF Election is a section 1295(b) election by which a US PFIC shareholder includes a pro rata share of the fund's ordinary earnings and net capital gain in income each year.
When must a QEF election be made?
A QEF Election is generally due by the due date, including extensions, of the shareholder's income tax return for the first tax year to which the election applies.
Related terms
- Passive Foreign Investment Company (PFIC) — Entity class to which the election applies
- Form 8621 — IRS form used to make and report the election
- US Person — Taxpayers subject to PFIC rules worldwide
- Accidental American — Group often holding local funds unknowingly
Related guides
- Global tax reform and US digital nomads — US tax issues for Americans abroad
Sources
Last verified: 2026-10-09. This entry is general information, not tax or legal advice; rules vary by country and change over time.
