Taken from article originally published 18 September 2023

As a tax professional specializing in US tax matters in New Zealand, I am often posed with the question, "Does Sharesies offer a prudent investment choice for US citizens?" Well, while it has the potential to be advantageous, it frequently falls short of being so.

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For those who may not be acquainted with Sharesies, here's a concise explanation of the tax implications for US citizens residing in New Zealand.

About Sharesies

Sharesies is a New Zealand-based investment platform that grants investors access to a diverse array of markets for purchasing shares. A distinctive feature of Sharesies is its provision of fractional shares, enabling investors to own a part of a share, thus lowering the cost compared to acquiring a whole share.

Consider a scenario where Apple stock is trading at approximately US$169 per share. Platforms like Sharesies facilitate the acquisition of a fraction of Apple stock, rather than the complete $169 share.

This innovation has made share trading in New Zealand available to a much greater audience, rapidly gaining popularity.

While Sharesies can indeed serve as a promising investment avenue when tailored to fit US taxation considerations, it is not uncommon for investments to be made without such foresight.

The Principal Hurdle for US Citizens and Sharesies: PFICs

One major hurdle encountered by US citizens utilizing Sharesies pertains to Passive Foreign Investment Companies (PFICs), and unfortunately, Sharesies hosts a number of them (some even consider Sharesies itself to be a PFIC).

PFICs in Brief

To elaborate, a PFIC (Passive Foreign Investment Company) is a non-US entity that generates at least 75% of its income from passive sources. These entities, often bearing names such as the NZX Top 100 Fund or the Asian Tech Fund (for illustrative purposes), typically lack active business operations and are primarily focused on investing in other companies.

Entities that earn income through active business operations, such as Air New Zealand or Spark, do not fall under the category of PFICs.

For US citizens, PFICs entail not only elevated taxation by the IRS but also intricate reporting on Form 8621.

Each distinct PFIC investment necessitates the completion of its individual Form 8621 annually, incurring potentially substantial reporting costs.

The IRS taxes PFICs on their unrealized gains each year, encompassing the increase in fund value irrespective of whether the investor sells their holdings. Moreover, the reporting obligations are multifaceted, intricate, and costly. The IRS itself estimates that reporting each PFIC could consume around 32 hours annually.

As an example, if an individual owned shares in a PFIC valued at $1000 at the start of the year, and this value escalated to $1500 by year-end, a tax liability could arise for the $500 growth, even if no actual withdrawal took place.

The reporting threshold for PFICs is set at $25,000 USD for all combined investments. In essence, if an individual possessed $20,000 within a KiwiSaver account (assuming it qualifies as a PFIC) and $6000 invested through Sharesies, the $25,000 threshold would be met across the cumulative investments.

It is important to note that $6000 investments in a single company through Sharesies are relatively rare; typically, investors distribute their funds across multiple funds

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US Citizens' Predicament

With an understanding of Sharesies and PFICs, the challenges confronting US citizens become evident.

Frequently, we observe that Sharesies investments evolve into costly predicaments for US citizens. Sharesies actively promotes diversification, urging members to allocate investments across various companies and funds – a financially prudent move in most contexts.

Yet, from a US taxation perspective, this can result in an individual possessing numerous PFIC investments, each with relatively low value. Instances where clients hold 20 PFIC investments, each valued at $50, are not uncommon.

As is now clear, this situation could necessitate filing 20 separate Forms 8621, one for each PFIC. The compliance expenses often exceed the actual investment value.

While PFIC investments are not inherently negative, investing small sums across multiple funds can lead to substantial reporting obligations, even for low-value investments.

Generally, investments in PFICs are more viable with larger sums, where returns surpass compliance costs.

It is worth noting that the reporting effort for a PFIC is comparable, whether the investment is $500 or $50,000. Consequently, even modest investments incur considerable reporting expenses.

Summary

Sharesies promotes diversified investments through its user-friendly platform, catering to both novice and seasoned investors. Nevertheless, one could argue that Sharesies could do more to caution its US citizen clients to seek advice prior to investing.

While their website includes customary disclaimers, the efficacy of these disclaimers is debatable, considering the number of US citizen investors who find themselves embroiled in substantial compliance issues. In my opinion, the suggested caution to investors falls short.

For US citizen investors, seeking US tax guidance before making investment decisions can avert substantial costs in compliance, stress, and potentially taxes as well.

It is important to underscore that the above content is not intended as financial advice; rather, it offers an assessment of Sharesies solely from the perspective of US tax considerations.