On the same day that the Securities and Exchange Commission issued long-awaited rules for money market mutual funds, the Internal Revenue Service has issued its own rules for money market funds and wash sales.
Revenue Procedure 2014-45 describes the circumstances in which the IRS will not treat a redemption of shares in a money market fund as part of a wash sale. Revenue Procedure 2014-45 responds to SEC rules that change how certain money market fund shares are priced.
In addition, the IRS and the Treasury Department issued a notice of proposed rulemaking on changing the method of accounting for gains and losses on shares in certain money market funds. The document contains proposed regulations that provide a simplified method of accounting for gains and losses on shares in money market funds (MMFs) that distribute, redeem, and repurchase their shares at prices that reflect market-based valuation of the MMFs’ portfolios and more precise rounding than has been required previously (floating net asset value MMFs, or floating-NAV MMFs).
The proposed regulations also provide guidance regarding information reporting requirements for shares in MMFs. The proposed regulations respond to SEC rules that change how certain MMF shares are priced. The proposed regulations affect floating-NAV MMFs and their shareholders. This document also contains requests for comments and provides notice of a public hearing on these proposed regulations.
The SEC adopted amendments Wednesday to the rules that govern money market mutual funds. The amendments make structural and operational reforms to address the risks of investor runs in money market funds, while preserving the benefits of the funds. The rules build upon the reforms adopted by the SEC in March 2010 that were designed to reduce the interest rate, credit and liquidity risks of money market fund portfolios. When the Commission adopted the 2010 amendments, it recognized that the 2008 financial crisis raised questions of whether more fundamental changes to money market funds might be warranted.
In September 2008, as the financial crisis began to roil the markets, investors and financial regulators grew even more concerned when a popular money market fund, the Reserve Fund’s Primary Fund, “broke the buck,” that is, the value of each dollar invested dropped below a dollar.
The new SEC rules require a floating net asset value, or NAV, for institutional prime money market funds, allowing the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools—liquidity fees and redemption gates—to address runs.
The IRS noted that stable share prices simplify the taxation of transactions in money market fund, or MMF, shares because a shareholder does not realize gain or loss when a share is redeemed for an amount equal to its basis. Shareholders typically will realize gain or loss, however, on redemptions of floating-NAV MMF shares.
In certain circumstances, a loss realized on the redemption of an MMF share may implicate the wash sale rules of Section 1091 of the Tax Code. The Treasury Department and the IRS have proposed regulations to simplify the recognition of gain or loss on floating-NAV MMF shares. Shareholders of floating-NAV MMFs can rely on the proposed regulations before final regulations are issued.
Under the permissible method of accounting described in those proposed regulations, the aggregate gain or loss is determined for each computation period, and no gain or loss is determined for any particular redemption of a taxpayer’s s hares in a floating-NAV MMF. Without a determination of loss, a particular redemption does not implicate the wash sale rules. If a shareholder of a floating-NAV MMF, however, does not use this method of accounting, then that shareholder will typically experience frequent wash sales. The new revenue procedure provides relief for such a shareholder.
The revenue procedure is effective for redemptions on or after the effective date of the SEC money market fund reform rules (which is expected to be 60 days after the date that they are published in the Federal Register). Revenue Procedure 2014-45 will be published in Internal Revenue Bulletin 2014-33 on Aug. 11, 2014.