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
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.