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PFIC Tax-Drag Estimator
See roughly how much extra US tax you pay by holding an Israeli mutual fund or ETF (a PFIC) instead of a compliant US-domiciled fund, under the punitive §1291 regime.
For a US citizen or green-card holder, the most common and most expensive investing mistake in Israel is buying an ordinary Israeli mutual fund, ETF, or managed savings product. To the IRS, almost any non-US pooled fund is a PFIC, and selling it with no special election triggers the §1291 regime: the gain is spread back across every year you held it, the older slices are taxed at the top 37% ordinary rate regardless of your bracket, and an interest charge is piled on top.
This estimator shows the order of magnitude. Enter your gain, how long you held the fund, and your top ordinary rate, and it compares a rough §1291 bill against what the same gain would cost inside a compliant US-domiciled ETF (taxed at long-term capital-gains rates). On a long-held position the effective PFIC rate can run roughly double the compliant one.
This is an illustration of scale, not a filing figure. The real calculation allocates the gain day by day and compounds the interest, and a QEF or mark-to-market election changes everything. Read the full guide to the PFIC problem for US olim and work the binding numbers on Form 8621 with a cross-border CPA before you act.
Your Israeli Fund (as a US Person)
rates as of 2026 (US federal)
Estimate the extra US tax a US citizen or green-card holder pays by holding an Israeli pooled fund (a PFIC) instead of a compliant US-domiciled ETF. Enter the gain in US dollars. This is a rough order-of-magnitude estimate, not a filing figure.
Total gain on the fund (USD)
$100,000
Years held
10 years
Your top ordinary rate
37%
$50,320
PFIC §1291 tax (~50% effective)
$23,800
Compliant US-ETF tax (23.8%)
$13,320
Of which: §1291 interest charge
Extra US tax from holding the PFIC instead of a compliant US-domiciled ETF
$26,520
How the estimate breaks down
Total gain
$100,000
Prior-year slices at 37%
$33,300
Current-year slice at 37%
$3,700
Interest charge (approx.)
$13,320
PFIC §1291 total
$50,320
Compliant US-domiciled ETF
$23,800
Extra cost of the PFIC
$26,520
Why a normal Israeli mutual fund is a US tax trap
To the IRS, almost any non-US pooled fund (Israeli mutual fund, ETF, managed kupat gemel, or savings policy) is a PFIC. With no special election, selling it triggers §1291: the gain is spread back across every year you held it, the older slices are taxed at the top 37% ordinary rate no matter your bracket, and an interest charge is added on top. The result is often an effective rate well above a normal capital-gains rate.
The fix is usually to hold US-domiciled funds
A US citizen or green-card holder typically avoids the whole regime by investing through US-domiciled ETFs and funds (held in an account that will accept a US person), which are taxed at ordinary long-term capital-gains rates instead. The compliant column above uses the top 23.8% rate. Untangling an existing PFIC needs a cross-border CPA: do not just sell.
Why this is only an estimate
The real §1291 calculation allocates the gain across each day of the holding period and compounds the interest charge, so it can run higher than this simple annual approximation, especially over long holds. A QEF or mark-to-market election, made in time, changes the math entirely. Treat this as an illustration of scale and confirm your numbers on Form 8621 with a cross-border tax professional.
שתפו:
Frequently asked questions
To the IRS, a PFIC (passive foreign investment company) is essentially any non-US pooled investment: Israeli mutual funds, Israeli ETFs (kranot sal), many managed kupot gemel and savings policies (bituach hayim chisachon), and similar vehicles. A single foreign company share is not a PFIC; a fund that holds those shares for you usually is.
Under §1291, your gain is allocated across every year you held the fund. The slices allocated to prior years are taxed at the highest ordinary rate in effect for each year, currently 37%, no matter your actual bracket, and an interest charge is added as if you had underpaid tax all along. The longer you held it, the more of the gain is pushed into prior years and the larger the interest, which is why the effective rate climbs with the holding period.
The usual fix is to invest through US-domiciled ETFs and funds instead, which are taxed at ordinary long-term capital-gains rates rather than under §1291. You generally need a brokerage that accepts a US person abroad. If you already hold a PFIC, do not just sell it: a QEF or mark-to-market election, made in time, or a planned unwind with a cross-border CPA, can reduce the damage.
It can. Mandatory Israeli pension funds often get specific treaty and treatment arguments, but voluntary vehicles like a managed kupat gemel, hishtalmut, or a savings policy are frequently PFICs in IRS eyes. The rules are technical and contested, so a US person should confirm the treatment of each Israeli vehicle with a cross-border professional rather than assume.
No, it is a rough estimate of scale. The real §1291 calculation allocates the gain across each day of the holding period and compounds the interest charge, so it can run higher than this simple annual model, especially over long holds. Use it to understand how serious the drag is, then compute the binding figure on Form 8621 with a tax professional.
Related reading
The PFIC problem for US olim
Why ordinary Israeli funds are a US tax trap, and the compliant ways to invest instead.
A US-domiciled brokerage account as an oleh
Holding compliant US-domiciled ETFs from Israel, and the account setup that allows it.
The tax-advantaged account order for olim
Which accounts to fill first when you straddle the US and Israeli tax systems.
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