You opened an Israeli trading app and it feels like a game
If you are a US citizen or green-card holder, the setup in front of you is genuinely dangerous. The interface is engineered to make buying effortless, and it is sitting on top of a market whose default products are Passive Foreign Investment Companies. Every impulsive tap on an Israeli fund attaches another Form 8621 to your US return, for as long as you hold it.
This is not a warning a lifelong Israeli ever receives. For a native, buying a shekel index fund inside a slick app is the textbook sensible move, and the only real question is the management fee. For you, the exact same tap is the one action in the whole app that a US filing regime treats as expensive. Almost every new oleh is blindsided by that inversion, because nothing on the screen hints at it.
Not advice
What is the app actually doing to you?
It is driving the cost of placing an order towards zero while raising the emotional reward for placing one. The specific mechanics are consistent across consumer trading products:
- Streaks and open-the-app counters that reward daily attention to a portfolio you are supposed to leave alone for decades.
- Push notifications keyed to price moves, which convert ordinary volatility into an event that seems to demand a response.
- One-tap re-ordering from a position card, so a פקודת קנייה (Pkudat K'niya) (buy order) takes less deliberation than sending a text message.
- A pre-populated watchlist of locally domiciled funds, which quietly makes the house default into your default.
- Zero or near-zero headline commission, which reads as free even where the bid-ask spread and the עמלה (Amlah) (fee) on custody or FX still apply.
None of that is unique to Israel. What is unique to your situation is which instrument the design points at.
Does trading more actually lower what you keep?
On the largest published account-level study of individual investors, yes, and the gap is wide. Barber and Odean examined 66,465 households at a large US discount broker from 1991 to 1996 and found that the households which traded most earned an annual net return of 11.4% while the market returned 17.9%. The average household earned 16.4% and turned over 75% of its portfolio every year1.
| Barber and Odean, 66,465 US households, 1991 to 1996 | Annual net return |
|---|---|
| The market | 17.9% |
| The average household in the sample | 16.4% |
| The households that traded most | 11.4% |
The study predates the smartphone entirely, which is exactly why it is useful here. The behaviour it measured still required a phone call or a desktop session and a real commission. The app removes both of those brakes, and it does so for an audience that in your case also carries a filing regime the 1990s sample never faced.
Which instrument is one tap away in an Israeli account?
Usually an Israeli-domiciled pooled fund. Inside a shekel תיק השקעות (Tik Hashkaot) (investment portfolio) at an Israeli institution, the products that are cheapest to reach, best merchandised, and free of any currency step are the local ones: a קרן נאמנות (Keren Neemanot) (Israeli mutual fund), a TASE-listed ETF, or an investment provident fund. Israeli fund prospectuses and issuer disclosures sit under Israel Securities Authority regulation, and they state the issuing entity plainly11. That entity is Israeli, which is the whole problem.
Israeli tax treatment
Israel treats these as ordinary securities held by an ordinary resident. Real capital gains on securities for an individual are taxed at 25%, and at 30% for a substantial shareholder8. Note what this means against your aliyah clock: the 10-year new-resident exemption covers foreign-source income and gains, so an Israeli-domiciled fund sits outside the exemption while a foreign holding sits inside it. And if you made aliyah on or after 1 January 2026, the reporting exemption is gone. Foreign income and assets are reportable to the Israel Tax Authority every year even while they remain exempt from tax7.
Home-country treatment: what PFIC costs a US person
US citizens and green-card holders file US returns on worldwide income for life, wherever they live5. A foreign corporation is a PFIC when 75% or more of its gross income is passive, or at least 50% of its assets are held to produce passive income3. A fund whose entire job is holding dividend-and-interest-bearing securities meets that test by construction, so the Israeli fund the app just sold you is a PFIC in your hands.
Under the default section 1291 method, an excess distribution or a gain is allocated across your holding period, the amounts allocated to prior PFIC years are taxed at the highest ordinary rate then in force, and a separate interest charge under section 1291(c) runs on top3. The two escape routes are narrow: a Qualified Electing Fund election needs a PFIC Annual Information Statement that Israeli funds almost never publish, and the mark-to-market election has its own conditions and taxes gains as ordinary income3. Separately, a US shareholder generally files one Form 8621 for each PFIC owned during the year2, and section 1298(f) imposes an annual reporting duty of its own3.
| IRS published burden estimate, one Form 8621 | Time |
|---|---|
| Recordkeeping | 16 hr, 58 min |
| Learning about the law or the form | 11 hr, 24 min |
| Preparing and sending the form to the IRS | 20 hr, 34 min |
| Total, per PFIC, per year | Roughly 49 hours |
Those are the government's own numbers, published in the Paperwork Reduction Act notice to the Form 8621 instructions4. They cover filers whose burden is not already folded into the individual or business return estimates, so treat them as the IRS view of how heavy one of these forms is rather than as your personal invoice. Even at a fraction of that, an accountant billing the work will price it well above what a small impulse position is worth.
Per fund, per year, not per shekel
Treaty treatment
The US-Israel treaty does not fix this. The 1975 income tax convention and its technical explanation allocate taxing rights between the two countries and relieve double taxation, largely through credits6. PFIC is US domestic law, and the Form 8621 filing duty comes from the Internal Revenue Code, not from the treaty3. A credit for Israeli tax can reduce the same income being taxed twice; it does not remove a US information return, and it does not change how section 1291 computes the amount in the first place. Israeli tax relief and US filing relief are two different things, which is precisely why they need separate sections on this page.
Why is low friction plus high friction the worst possible combination?
Because the two frictions sit on opposite sides of the same decision, and only one of them is visible. The app compresses the choice to buy into under a second. The consequence expands into a multi-decade annual filing that you will not see until the following spring, when somebody who bills by the hour asks you for the acquisition date and cost basis of each fund you touched.
Picture a weekend. A new oleh, pleased to finally have a shekel account, buys three different Israeli index funds over two evenings because the app made each one a two-tap operation. In Israeli terms that person did something unremarkable and arguably sensible. In US terms they just created three permanent annual attachments to their tax return, each carrying section 1291 arithmetic on exit. Nothing in the interface distinguished those taps from buying a single Israeli share, which carries no PFIC consequence at all.
| What the tap buys | Israeli treatment for a resident | US treatment for a US-citizen oleh |
|---|---|---|
| Israeli mutual fund or TASE-listed ETF | Ordinary security, Israeli-source, 25% on the real gain for an individual | PFIC: Form 8621 per fund per year, default section 1291 method |
| US-domiciled ETF (a US corporation) | Ordinary security; foreign-source, so potentially inside the 10-year new-resident exemption | Not a PFIC, because the PFIC test applies to foreign corporations |
| Single Israeli or US company share | Ordinary security | Not a pooled fund, so the PFIC question does not arise for an operating company |
Knowledge check
You are a US-citizen oleh. Which factor determines how expensive a PFIC position is to comply with each year?
What is worth checking before you tap buy?
Three questions decide almost everything on this page, and all three can be answered before an order is placed rather than after.
- Whose corporation is this fund? Domicile decides PFIC status, not the exchange, the currency, or the app3. The issuing entity is stated in the fund's regulated disclosures11.
- Is this a pooled fund or a single company share? They sit next to each other in the same list and carry entirely different US consequences. Confirm which one the order screen is about to execute.
- Is the notification pattern serving your plan or replacing it? Turning off price-move alerts and streak reminders removes the trigger without removing the option. The research above is about turnover, and turnover starts with an interruption.
If you are a US person and any of your existing Israeli holdings are pooled funds, the single most useful next step is to list every fund you own with its purchase date and take that list to a licensed cross-border accountant before your next filing season, rather than discovering the position count during it. Our companion article on the PFIC problem covers the elections and the alternatives in more depth.
A gamified trading app lowers the cost of placing an order towards zero, and the research points the other way: Barber and Odean found that among 66,465 US discount-brokerage households from 1991 to 1996, the households that traded most netted 11.4% a year against a market return of 17.9%, while the average household turned over 75% of its portfolio annually. For a US-citizen oleh the problem compounds, because the cheapest and most prominent instrument in an Israeli account is an Israeli-domiciled fund or TASE-listed ETF, and every one of those is a Passive Foreign Investment Company for the IRS. That means a Form 8621 for each fund for each year, plus the punitive default section 1291 method on exit, with the IRS itself estimating roughly 49 hours of burden per form. The compliance cost scales with the number of funds and years, not with the amount invested, so a small impulse position can cost more to report than it is worth. Non-US olim face no PFIC regime at all. This is educational content, not tax advice.
Because PFIC is US law that follows the US passport, not Israeli law. Your Israeli friends hold an ordinary Israeli security taxed at 25% on the real gain. You hold a foreign corporation whose income is almost entirely passive, which is the definition of a Passive Foreign Investment Company, so the IRS applies Form 8621 and the section 1291 default method to the same holding.
Barely. A separate Form 8621 is generally required for each PFIC you owned during the year, regardless of value, so cost tracks the number of distinct funds and the number of years you hold them. A position worth a few hundred shekels and one worth several hundred thousand generate the same annual form and the same demand for acquisition dates and cost basis.
No. The 1975 convention allocates taxing rights and relieves double taxation, mostly through credits. The PFIC rules and the Form 8621 filing duty come from the Internal Revenue Code, not the treaty. A credit can stop the same income being taxed twice, but it does not delete a US information return and it does not change how section 1291 computes the tax on an excess distribution.
They are a turnover problem, and turnover has a measured cost. In the Barber and Odean sample, the most active households earned 11.4% a year while the market returned 17.9%, and the average household turned over 75% of its portfolio annually. The study predates smartphones, so it measured this behaviour when trading still required a phone call and a real commission. The app removes both brakes.
No. The new-resident exemption covers foreign-source income and gains, and an Israeli-domiciled fund is Israeli-source, so it sits outside the exemption from day one. A foreign holding is the one that can sit inside it. If you made aliyah on or after 1 January 2026, note that foreign income and assets became reportable to the Israel Tax Authority annually even while they remain exempt from tax.
Not about PFIC, which has no UK or Canadian equivalent. Once you are non-UK-resident under the Statutory Residence Test, or have severed Canadian residency and filed a departure return, your Israeli fund is simply an Israeli investment under Israeli rules. What still applies is the turnover research and the fees the order screen does not show you, which is a smaller problem than the American one but a real one.
Stop adding to the fund count first, because each additional distinct fund is another annual form. Then list every pooled fund you hold with its purchase date and the amounts paid, and bring that list to a licensed US-Israel cross-border accountant before filing season rather than during it. The elections that can soften section 1291 treatment are narrow and are decided case by case.