Last Updated 5 months ago

If you’ve been following my content for a while, you know I’ve written about PFICs before. What they are, why they matter for Americans in Israel, and what alternatives exist. If you haven’t read those blogs yet, I’d recommend starting there first.

But there’s one question that comes up almost every single time I post about PFICs.

“What if I just buy and sell within the same year?”

It’s a fair question. And the short answer is yes, it works. The punitive parts of the PFIC tax regime essentially disappear when your entire holding period falls within a single calendar year.

But the longer answer is more nuanced. There are real caveats that most people don’t think about until it’s too late. And depending on your situation, this strategy might cost you more than you expect.

Key Points

• The same-year strategy does eliminate the worst PFIC penalties, but it doesn’t eliminate all of them.
• Your gains are still taxed as ordinary income, never at capital gains rates.
• PFIC losses cannot be used to offset PFIC gains, which creates a painful asymmetry.
• Israel and the U.S. will see your gains and losses very differently, which can lead to unexpected tax bills.
• You still need to file Form 8621 for each PFIC, and that means real compliance costs.
• Wash sale rules can quietly disallow your losses if you’re not careful about timing.

A Quick Recap on Why PFICs Are So Punitive

I won’t go deep here since I’ve covered this in previous articles, but the quick version is this.

The PFIC tax regime under Section 1291 was designed to discourage U.S. taxpayers from parking money in foreign investment funds. When you hold a PFIC over multiple years and then sell it at a gain, the IRS allocates that gain across every year you held the investment. Each year’s portion gets taxed at the highest marginal rate in effect for that year, and then the IRS tacks on an interest charge as if you had owed that tax all along.

The result can be an effective tax rate north of 50%. It’s genuinely punitive.

But what is key is that the pain comes from the multi-year holding period. That’s what triggers the look back, the highest-rate treatment, and the interest charges.

So, what happens if you remove the multi-year element entirely?

How the Same-Year Strategy Works

The concept is straightforward. You buy a PFIC and sell it before December 31st of the same calendar year. Then, in January, you buy it again and repeat the process.

Because your entire holding period falls within a single tax year, the excess distribution calculation becomes almost trivial. There are no prior years to allocate gain to. There’s no highest-rate lookback. There are no interest charges.

The gain is simply reported as ordinary income in the current year on Form 8621 and flows through to your Form 1040. The math is dramatically simpler, and the truly punitive aspects of Section 1291 don’t apply.

So far so good. But this is where most people stop asking questions, and it’s exactly where the important questions begin.

The Caveats Nobody Tells You About

It’s Still Ordinary Income, Every Single Time

Even with the same-year strategy, your PFIC gain is taxed as ordinary income. Not as a long-term capital gain. Ordinary income, at rates up to 37%.

This matters more than people realize. If you held a US-domiciled ETF with similar exposure, say a Vanguard or iShares fund that tracks the same market, your long-term capital gains rate would be 15% or 20%. That’s roughly half the rate you’re paying on the PFIC gain.

In any single year, the difference might not feel dramatic. But when you’re doing this year after year, that rate differential compounds. Over a decade or more of investing, you’re giving up a significant chunk of your returns compared to simply holding the US-domiciled equivalent. Yes, you will be able to offset the U.S. taxes with Israeli taxes paid.  However, Israeli taxes on capital gains is usually 25%, so there is a good chance that your U.S. tax will be higher, leaving you with some remainder to pay Uncle Sam.  That is also if your PFIC losses don’t offset your PFIC gains in Israel, bringing your Israeli tax to 0%.  Why would that be?  Good question, and what we will look at next.

PFIC Losses Cannot Offset PFIC Gains

This is one of the most painful and least understood aspects of the PFIC regime, and it was confirmed by the Tax Court in Toso v. Commissioner.

The court held that Section 1291 applies to “any gain recognized on such disposition,” using the singular. That means each PFIC is treated as its own separate event. If you sell three PFICs and two of them have gains while one has a loss, you cannot net them against each other for US tax purposes. You owe ordinary income tax on the full amount of the gains. The loss is treated as a capital loss, which can only offset other capital gains from non-PFIC sources, or up to $3,000 of ordinary income per year.

Think about that for a moment. You could have a portfolio of Israeli mutual funds where your overall position is basically flat, and you’d still owe meaningful U.S. tax on the winners while getting almost no current benefit from the losers.

The U.S. and Israel See Very Different Numbers

This is where the no-netting rule really starts to hurt for Americans in Israel.

Israel treats your investment portfolio the way most people would expect. Gains and losses across all securities can be netted against each other. If you made ₪50,000 on two funds and lost ₪30,000 on a third, Israel taxes you on the net ₪20,000 at 25%.

The U.S., following Toso, sees something completely different. It taxes you on the full ₪50,000 of gains as ordinary income and largely ignores the ₪30,000 loss for purposes of offsetting that PFIC income.

The practical result is that your Israeli tax bill on these investments may be relatively modest, while your U.S. tax bill is significantly larger. And because you paid less Israeli tax, you may not have enough foreign tax credits to meaningfully offset the U.S. liability.

Your Israeli neighbors who aren’t US citizens are paying 25% capital gains tax on the net gain. You could be paying close to 37% on the gross gains. Same portfolio, same funds, very different outcome.

Compliance Costs Are Still Real

The same-year strategy simplifies the Form 8621 calculation, and that’s a genuine benefit. But it doesn’t eliminate the form.

You still need to file a separate Form 8621 for each PFIC you hold. The IRS estimates that each form takes roughly 22 hours to complete.  If your CPA tells you that’s how long it takes them, though, please find a new CPA. It takes time, but not hours of time per PFIC. Even if your accountant is using the faster processor and can do it in seconds, you’re paying professional fees for these complex forms. If you’re holding three, four, or five Israeli mutual funds and cycling through them annually, those compliance costs add up quickly.

It’s certainly less expensive than the multi-year PFIC nightmare. But it’s far from free, and it’s far more expensive than the reporting requirements for holding US-domiciled funds.

But with all of that, same-year buying and selling still may be the best option in a world of unfair rules.  If you do it, though, do it right.  Beware the wash sale rules.

Wash Sale Rules Can Quietly Disallow Your Losses

Here’s one that catches people completely off guard.

The whole strategy depends on selling before December 31 and rebuying in early January. But under the wash sale rule, if you sell a security at a loss and buy the same or a “substantially identical” security within 30 days, the loss is disallowed.

So, if one of your PFICs is down when you sell it in late December, and you rebuy it in the first week of January, you’ve triggered a wash sale. That loss is gone for the current tax year. It gets added to the cost basis of the new shares, which defers the benefit to some future date, but you can’t use it now.

Meanwhile, your PFIC gains from the same year are fully taxable as ordinary income. And because of the no-netting rule we just discussed, even if the loss hadn’t been disallowed, it wouldn’t have offset the PFIC gains anyway.

To avoid the wash sale, you’d need to wait at least 31 days before rebuying. That means staying out of the market well into February, which creates exposure gaps. Or you could buy a different fund that isn’t substantially identical but depending on what Israeli market exposure you’re trying to maintain, a suitable alternative might not exist.

Most people running this strategy don’t think about wash sales until their accountant flags it at tax time.

What Should You Do Instead?

I want to be clear. The same-year strategy isn’t wrong. It does what it claims to do. It eliminates the interest charges and the highest rate look back that make multi-year PFIC holding so painful.

But it’s not the easy win people think it is. You’re still paying ordinary income rates. You can’t net your losses. The US and Israeli tax pictures can diverge dramatically. You’re paying for Form 8621 preparation every year. And wash sale rules add another layer of complexity.

For someone who already holds PFICs and needs to manage the situation in the short term, this can be a reasonable transitional approach. It buys you time while you restructure your portfolio.

But as a long-term investment strategy, you’re fighting the tax code every single year. And there are simpler, more tax-efficient alternatives available to Americans in Israel. US-domiciled ETFs and mutual funds offer equivalent market exposure without any of the PFIC headaches. Individual stocks on foreign exchanges avoid the PFIC classification entirely. I’ve written about these options in more detail in my previous articles.  The only issue with that option is being tied to the U.S. Dollar.  Something that could be worse than PFIC taxes, and which we addressed in our latest blog.

The Best Fit to Help You

The question isn’t really “can I buy and sell a PFIC within the same year?” You can. And it does reduce the tax pain.

The real question is if your accountant is equipped to help you with the reporting requirements.  If you want a firm that is very familiar with PFICs, and how to avoid and treat them properly, get in touch.