New IRS Guidance Provides Money Market Fund Wash Sale Relief

The Internal Revenue Service has issued guidance to reduce undue tax compliance burdens resulting from money market fund reforms finalized in July by the Securities and Exchange Commission.

The IRS guidance "allows redeeming money market fund shareholders to immediately take losses attributable to liquidity fees," Katie Sunderland, associate general counsel at the Investment Company Institute, a mutual fund trade group, told ThinkAdvisor on Monday.

The IRS exemption "from the wash sale rule is timely as it takes effect on [Oct. 2] the same date as the SEC's new liquidity fee requirements," Sunderland said. "The IRS guidance thus relieves everyday investors from significant unwarranted tax reporting complexities that otherwise would arise from the new SEC rule."

For all money market funds, the SEC increased the daily liquid asset minimum to 25% of total assets from 10% and the weekly liquid asset minimum to 50% of total assets from 30%.

Accordingly, the IRS states in its new guidance that it "will not treat as part of a wash sale a redemption of a share" in any money market mutual fund.

As the ICI explained, "any shareholder who redeems shares of a fund and reinvests dividends every month will have a wash sale — absent an exemption — any time the redemption is at a loss (due to the 30 days before/after aspect of the wash sale rule)."

Shareholders in money market funds with floating net asset values, because of guidance issued by the IRS in 2014 "can use the NAV method — which effectively calculates gains and losses only on an annual basis and … are exempt from the wash sale rule," the ICI explained.

Thanks to this new IRS guidance, ICI states, "shareholders in stable NAV money market funds are exempt from the wash sale rule," and "they can deduct immediately any redemption loss."

SEC Amendments

In July, the SEC finalized a rule to increase minimum liquidity requirements for money market funds to provide "a more substantial liquidity buffer in the event of rapid redemptions."

The amendments also removed provisions in the current rule "that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold."

The changes, the SEC said, "are designed to reduce the risk of investor runs on money market funds during periods of market stress."