PFIC Trap for Americans with Israeli Investments (Keren, TASE ETFs)
The PFIC Trap: Why Israeli Holdings Hurt US-Person Tax Returns
Disclaimer: This is informational. PFIC rules are among the harshest in
the Internal Revenue Code. Engage a US-licensed tax advisor before
restructuring investments.
What is a PFIC
PFIC stands for Passive Foreign Investment Company. The IRS defines it by qualitative criteria — most foreign mutual funds and ETFs automatically qualify. The IDF's Keren funds and most ETFs on the Tel Aviv Stock Exchange are PFICs.
If you hold a PFIC as a US person, you owe tax plus:
- an interest charge on the deferred liability, and
- in the worst case, the excess distribution regime taxes the gain as
ordinary income (vs. capital gains), at the highest marginal rate.
The result: a Keren balance that produced ~3% Israeli returns can produce a real after-tax drag of 5-25% annually after the IRS gets done with it.
Why this happens to Olim
Common patterns:
- "I'll just keep my Keren like I had before making aliya" — but you
- "My advisor said TASE ETFs are safe" — for Israeli tax, yes. For
- "I'll just sell before I have to file" — short-term capital gains hit
are now a US person for tax purposes again.
US tax, catastrophic.
twice: capital gains tax in Israel + the exit from PFIC on the US return.
Options
- QEF election — the cleanest. The PFIC files annual reports that
- Mark-to-Market election — mark the PFIC to market annually, pay tax
- Liquidate before recognition events — sell the PFIC and restart
- Deemed sale / step-up — for PFICs held on the day your grantor
- Do nothing, file 8621 every year — most common for small positions
you can include on 8621. Israeli funds don't file these, so QEF is rarely available for Israeli holdings in practice.
on gains as ordinary income. Workable for active ETFs.
fresh under the "start of year" rule. Useful when the position is small or recently acquired.
trust beneficiary status changed, a deemed sale election can reset the cost basis. Strict rules, time-sensitive.
where the tax hit is bearable.
The 2026 update
New 2026 Israeli tax rules added reporting thresholds for Israeli financial institutions holding accounts of foreign-resident US persons. Your TASE brokerage now mirrors a US broker in the depth of 1099-like reporting.
Practical move: open an IBKR Cash account, liquidate the TASE ETF positions over a year to spread the Israeli capital gains impact, and reallocate to IBKR-friendly options like:
- US-domiciled ETFs (VTI, VXUS, SCHD).
- Individual stocks treated as regular CFCs (no PFIC overlay).
- Notes — Israeli ETFs that are SP 500 only sometimes pass the active
test; verify with the fund's prospectus.
Need help?
This is where a US tax advisor who understands Israeli instruments earns their fee. The CPA fee ($500–$2,500) is small compared to a missed election.
[BUTTON: Open IBKR Cash Account]
---
Next step: if you have a US brokerage open in Israel and need to lock in tax-compliant investing — read our full IBKR guide.