Clark Stott has been with Expat Tax Online since 2015. Being a dual national based in the UK, Clark has unique experience helping US citizens (and Accidental Americans) become tax compliant via the Streamlined Tax Amnesty program. Clark likes to help Americans in the UK keep their tax situations as simple as possible to avoid harsh IRS treatment.
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Is investing in Sharesies a tax trap for US citizens in New Zealand?
Yes, investing in Sharesies can be challenging for US citizens in New Zealand because many options are classified as Passive Foreign Investment Companies (PFICs). This classification triggers complex US tax reporting and can result in higher taxes and significant penalties if not properly managed.
Why is investing in foreign entities complicated for US citizens?
The US tax code imposes strict compliance burdens on US citizens investing abroad to discourage foreign investments. Gains from these investments are heavily taxed, and compliance requires extensive reporting.
What is Sharesies?
Sharesies is a popular New Zealand investment platform allowing users to invest in a variety of assets, including:
- Individual Stocks: Buy shares in various companies.
- ETFs: Funds that track specific indexes.
- Managed Funds: Pooled investments managed by professionals.
How do Sharesies investments qualify as PFICs?
A PFIC is defined by the IRS as a foreign corporation that meets one of these criteria:
- 75% or more of its income is passive (dividends, interest, rents, royalties, or capital gains).
- 50% or more of its assets generate passive income.
Many Sharesies investments, like ETFs and managed funds, meet these criteria, which classifies them as PFICs.
Why should US taxpayers be cautious about PFICs?
This is mainly because PFICs are subject to strict US tax rules that have been created to prevent tax deferral. US taxpayers holding PFICs may face:
- Higher taxes due to interest charges on deferred tax.
- Complex reporting requirements, including filing additional forms.
- Significant penalties for non-compliance.
How are PFICs taxed by the IRS?
PFICs are taxed annually on unrealized gains, meaning you owe taxes on the investment’s value increase even if you haven’t sold it. For example, if a PFIC investment increases from $2,000 to $3,500, you may owe taxes on the $1,500 gain.
What are the reporting obligations for PFICs?
Each PFIC investment requires filing Form 8621 annually. Completing Form 8621 can take about 20-32 hours per PFIC, making the process complex and costly, especially with multiple investments.
When do you need to report PFICs?
The reporting threshold for PFICs is $25,000 in combined investments. If your total PFIC investments exceed this amount, you must report them. For example, if you have $20,000 in one PFIC and $6,000 in Sharesies, you are required to file Form 8621 for each investment.
Why is this significant?
Investors often spread money across multiple funds, leading to numerous low-value PFIC investments. Each requires separate reporting, which can be burdensome. For instance, 20 PFIC investments, each worth $120, would necessitate filing 20 forms.
