Is the Sharesies a tax trap for US citizens in New Zealand?
Published on July 04, 2024

Jonathan Rose, an IRS Enrolled Agent with 14 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in Australia.
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Table of Contents
Is Sharesies a tax trap for US citizens living in New Zealand?
Yes, investing in Sharesies can be a tax trap for US citizens living in New Zealand because many of its investment options fall under the category of Passive Foreign Investment Companies (PFICs). This classification leads to complex US tax reporting requirements, resulting in higher taxes and potential penalties if not managed correctly.
Why does the US tax code complicate foreign investments?
The US tax code is designed to discourage citizens from investing outside the United States. Foreign investments, particularly in stock market funds, come with significant US tax compliance obligations.
Any gains from these investments are heavily taxed, even if the investments haven’t been sold and no profits have been realized.
What is Sharesies?
Sharesies is an investment platform that has become very popular in New Zealand due to its easy-to-use interface and wide range of investment options. It allows users to invest in various assets, including stocks, ETFs, and managed funds, with the flexibility to start with minimal amounts of money.
What types of investments are available through Sharesies?
Sharesies offers a diverse range of investment options, such as:
- Individual Stocks: Buying shares in companies listed on various stock exchanges.
- ETFs (Exchange-Traded Funds): Funds that track specific indexes and are traded on stock exchanges.
- Managed Funds: Professionally managed funds that pool money from multiple investors to invest in a diversified portfolio.
Are investments in Sharesies considered PFICs?
A Passive Foreign Investment Company (PFIC) is defined by the IRS as a foreign corporation that meets one of the following criteria:
- At least 75% of its gross income is passive income, which includes dividends, interest, rents, royalties, and capital gains.
- At least 50% of its assets produce or are held to produce passive income.
How do Sharesies investments qualify as PFICs?
Many investment options available through Sharesies, such as stocks, ETFs, and managed funds, are classified as PFICs because they generate passive income and are managed by foreign entities, meeting the IRS criteria.
Curious if a Sharesies investment is right for you? Don’t hesitate to contact us.
Are all foreign companies classified as PFICs?
No, not all foreign companies are classified as PFICs. Companies that earn their income through active business operations are not considered PFICs.
Why is it important for US taxpayers to identify PFIC investments?
PFICs are subject to stringent US tax rules designed to prevent tax deferral and ensure transparency. Holding PFICs can result in:
- Higher taxes due to interest charges on deferred tax.
- Complicated reporting requirements, necessitating the filing of additional forms and maintaining detailed records.
- Significant penalties if reporting requirements are not met.
How does the IRS tax PFIC investments?
PFICs are taxed on their unrealized gains each year, meaning you are taxed on the increase in value of the investment, even if you haven’t sold it. For example, if your PFIC investment increases from US$2,000 to US$3,500 over a year, you may owe taxes on the US$1,500 gain, despite not having sold the investment.
What are the reporting requirements for PFICs?
Each PFIC investment requires its own Form 8621 to be filed annually. Completing Form 8621 can take around 20-32 hours per PFIC, making the process complex and costly, especially if you hold multiple PFIC investments.
When must you report PFIC investments?
You must report PFIC investments if your combined PFIC holdings exceed US$25,000. For instance, if you have US$20,000 in one PFIC investment and US$6,000 in another, you have exceeded the reporting threshold and must file Form 8621 for each PFIC.
Why is PFIC reporting such a big deal?
Investors often spread their money across multiple funds, leading to numerous low-value PFIC investments. Each investment requires separate reporting, so having multiple PFICs, even if they are of low value individually, can result in a significant reporting burden.
For example, having 20 PFIC investments, each worth US$120, would require filing 20 forms, greatly increasing the complexity and cost of compliance.