- When the units are sold, the MF holder is taxed for long term capital gains only on part of gains which have not been taxed in previous years under ordinary income.

There is also a special provision where people buy MFs before becoming U.S. citizens but later become U.S. residents or citizens. Navani explains, "X, a nonresident of the U.S., buys marketable stock in a PFIC for $50 in '95. On January 1, 2005, X becomes a U.S. resident. The fair market value of the stock on January 1, 2005, is $100. The fair market value of the stock on December 31, 2005, is $110. X computes the amount of mark-to- market gain or loss in 2005 using a $100 adjusted basis. Therefore, X includes $10 in gross income as mark- to market gain and increases its adjusted basis in the stock to $110. X sells the stock in 2006 for $120. X must use its original basis of $50 plus the $10 mark-to-market basis adjustment. Therefore X recognizes $60 of gain, of which $10 would be ordinary income and $50 long-term capital gain."