The IRS has issued guidance (Rev. Proc. 2023-35) broadening the scope of previous guidance (Rev. Proc. 2014-45) providing that that the IRS will not treat a redemption of money market funds (MMFs) as part of a wash sale under Section 1091 (the Wash Sale Rule). The new guidance expands the relief from the Wash Sale Rule to redemptions of all types of MMFs.
The original guidance was issued in response to 2014 rules from the SEC that changed how certain MMFs determine net asset value and compute their price-per-share. MMFs are investment companies registered under the Investment Company Act of 1940 that seek to maintain stable prices at which are issued and redeemed, typically $1 per share. Under the 2014 rules, certain types of MMF were required to be “Floating-NAV MMFs” use market factors to value their net asset value per share and certain rounding conventions to determine price per share. For this reason, the share price on Floating-NAV MMFs can change often, but usually within a narrow range.
The fluctuating price meant taxpayers taking money in an out of a Floating-NAV MMF could redeem shares for slightly different amounts than their original price, creating small gains and losses. The losses could be caught by the Wash Sale Rule. The Wash Sale Rule under Section 1091(a) disallows a loss realized by a taxpayer on a sale or disposition of stock or securities if the taxpayer acquires, or enters into a contract to acquire, substantially identical stock or securities within 30 days before or after the date of such sale or disposition.
The IRS responded by issuing Treas. Reg. Sec. 1.446-7 and Rev. Proc. 2014-45 to reduce the burdens on taxpayers. The rules provide that the IRS will not treat a redemption of shares of a Floating-NAV MMF as subject to the Wash Sale Rule.
The guidance generally did not apply to “Stable-NAV MMFs” because these types of MMFs are able to maintain a constant share price by using an amortized cost method to determine net asset value per share and a penny-rounding method to determine price share. The fact that Stable-NAV MMFs maintain a constant share price allows shareholders who acquire shares for $1 per share to have no gain or loss on the redemption of those shares for $1 per share.
In July 2023, however, the SEC amended Rule 2a-7 to change allow MMFs to impose a liquidity fee on redemptions, which could affect both Stable-NAV MMFs and Floating-NAV MMFs. When an MMF has a liquidity fee in effect, the fee reduces the proceeds received by a redeeming shareholder, therefore, the fee could give rise to a loss on a redemption for shareholders in either type of MMF. Rev. Proc. 2023-35 extends the scope of the 2014 revenue procedure and provides that the service will not treat the redemption of one or more shares of any MMF as part of a wash sale.
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