United States

Proposed regulations issued on wash sales rules for money market funds


On July 23, 2014 the IRS and the Treasury issued Rev. Proc. 2014-45, which describes when the IRS will not treat a redemption of shares in a floating net asset value money market fund (Floating-NAV MMF) as part of a wash sale under section 1091. Proposed regulations under sections 446 and 6045 describing a new method of accounting for gains and losses on shares in Floating-NAV MMFs were published on July 28, 2014.


A money market fund (MMF) is a type of investment company registered under the Investment Company Act of 1940 and regulated under Rule 2a-7 of that act. Rule 2a-7 currently permits an MMF to use the amortized cost method of valuation, the penny-rounding method of pricing, or both methods. These methods, coupled with the daily declaration of dividends, permitted MMFs to maintain a stable net asset value of $1.00 per share for distributions, redemptions and purchases.

Because of their perceived safety, MMFs are often used in sweep arrangements, with cash being deposited or withdrawn on a daily basis. These daily transactions historically did not result in realized gains or losses since the taxpayer's proceeds and cost basis were both $1.00 per share. However, newly adopted Securities and Exchange Commission MMF reform rules generally bar the use of the amortized cost method of valuation and the use of the penny-rounding method of pricing except by government MMFs and retail MMFs. In the case of an MMF that is neither a government MMF nor a retail MMF, the MMF will be required to value its portfolio securities using market-based factors that will result in a "floating" NAV, thereby triggering the realization of gains and losses when MMF shares are redeemed. The effective date for these rules is two years after their publication in the Federal Register.

Rev. Proc. 2014-45: Wash sales

The section 1091(a) wash sale rules generally disallow the recognition of a loss realized by a taxpayer on a sale or other disposition of shares of stock or securities if, within a period beginning 30 days before and ending 30 days after the date of such sale or disposition, the taxpayer acquires or enters into a contract or option to acquire substantially identical stock or securities. The taxpayer's basis in the property acquired is increased by the disallowed loss, thereby creating a deferral of the loss until the taxpayer disposes of the replacement property. Rev. Proc. 2014-45 excepts from the wash sale rules losses from redemptions of Floating-NAV MMF shares. The IRS indicated that it made this exception since it expects the values of these shares to be relatively stable and because of the administrative burdens associated with applying section 1091 to shares in floating-NAV money market funds. Therefore, section 1091(a) will not disallow the deduction for a loss resulting from the redemption of Floating-NAV MMF shares in the year realized, and section 1091(d) will not cause the basis of any other property to be determined by reference to the basis of the redeemed shares.

Prop. Reg. section 1.446-7: Simplified method of accounting for Floating-NAV MMF shares

Prop. Reg. section 1.446-7 describes a simplified method of accounting for gain and loss on Floating-NAV MMF shares, referred to as the net asset value method (NAV method). Under this method, a shareholder reports as a short-term gain or loss the net difference in the beginning and ending values of the shares during a computation period, less the shareholder's net investment in the MMF during the period. The character of the gain or loss depends on the character of the mutual fund shares in the shareholder's hands, which for most shareholders results in capital gain or loss. The proposed regulations treat the resultant net gain or loss as short-term gain or loss regardless of the actual holding period since the IRS believes tracking of actual holding periods under the aggregation method is unworkable. Use of the NAV method does not impact the reporting of dividends paid by a Floating-NAV MMF.


The NAV method of accounting may be applied for taxable years ending on or after July 28, 2014.

Prop. Reg. section 1.6045-1(c)(3)(vi): Information reporting for Floating-NAV MMF shares

Currently, money market funds that maintain a fixed (usually $1.00) NAV are excepted from cost-basis and gross proceeds reporting. The proposed regulations would modify the current rule to include Floating-NAV MMFs in the exception. The proposed rule applies to sales of shares in calendar years beginning on or after the regulations becomes final. However, taxpayers may rely on the regulations prior to finalization..


Under the NAV method, a taxpayer's resultant taxable gain or loss is as if the shares were marked-to-market each year. Although the proposed regulations and revenue procedure simplify the reporting of Floating-NAV MMF transactions, fund administrators will likely need to modify their tax basis reporting systems to accommodate the proposed NAV method and to adjust their wash sale calculations to exclude these transactions.


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