Today, the Securities and Exchange Commission (SEC) voted to require certain money market funds (MMFs) to price shares in a manner that more accurately reflects the market value of the funds’ underlying portfolios.  These particular MMFs will no longer be able to utilize the special exemptions that currently allow them to maintain a stable net asset value (NAV), and instead the share price will float, so the funds will be known as “floating-NAV” MMFs.  If a shareholder frequently purchases and redeems shares (as is the case where the fund is used as a “sweep arrangement”), the shareholder may experience a high volume of small gains and losses.  Tax compliance might be difficult and burdensome if these taxpayers had to ascertain the cost basis and gain or loss for each transaction. 

In response, the Treasury Department and the Internal Revenue today issued proposed guidance providing a simplified, aggregate annual method of tax accounting for these gains and losses, simplifying the tax treatment and promoting compliance.  Today’s guidance is proposed rather than final to provide the public an opportunity for comment.  Nevertheless, shareholders in floating NAV MMFs can now rely on these proposed regulations to begin to use the simplified method.

Specifically, today’s proposed guidance:

·         Allows shareholders to measure net gain or net loss without transaction-by-transaction calculations, simplifying tax compliance for shareholders.

o   As a result, shareholders can determine their net gain or loss using information that the funds routinely provide to them for non-tax purposes.

o   In particular, the net gain (or loss) is generally determined as—

§  The increase (or decrease) in the value of the investor’s shares during a period (such as the tax year), minus

§  The net investment in those holdings (purchases minus sales) during the period.

·         Extends to floating-NAV MMFs the same waiver of gross-proceeds reporting, basis reporting, and holding-period reporting rules that now applies to stable-value MMFs. 

Concurrently with the proposed regulations, Treasury and the IRS are issuing final guidance addressing the wash sale rules.  If shareholders choose not to use the simplified method described above, this guidance provides relief from the “wash sale” rules for any losses on shares of a floating-NAV MMF.  The wash sale rules don’t affect shareholders who use the simplified method.

o   A wash sale occurs when a shareholder sells a security at a loss, and within 30 days before or after the sale, acquires a substantially identical stock or security.

View the proposed regulations here.

View the associated Revenue Procedure here.

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