The IRS has issued a new procedure covering the wash sale rules for money market funds. The new procedure describes the circumstances in which the IRS will not treat a redemption of shares in a money market fund (MMF) as part of a wash sale for purposes of Code Sec. 1091. (Rev Proc 2023-35, 2023-42 IRB)
Investment Company Act of 1940.
An investment company registered under the Investment Company Act of 1940 that meets the requirements of Rule 2a-7 may hold itself out as an MMF. Historically, MMFs have sought to keep stable the prices at which their shares are distributed, redeemed, and repurchased.
Originally, Rule 2a-7 allowed MMFs to compute their price per share by using either or both (a) the amortized cost method of valuation, and (b) the penny-rounding method of pricing. These pricing methods were intended to enable MMFs to maintain stable share prices under most circumstances.
Amendments to Rule 2a-7.
In 2014, the SEC amended Rule 2a-7 to bar most MMFs from using the amortized cost method of valuation and the use of the penny-rounding method of pricing. Under the amended rules, an MMF that is neither a government MMF nor a retail MMF must value its portfolio securities using market-based factors and compute its price per share by rounding the fund’s net asset value per share to a minimum of the fourth decimal place.
The 2014 Amendments also allowed MMF to institute a liquidity fee if certain liquid assets of the MMF fall below a specified percentage of the MMF’s total assets.
If those liquid assets fall lower specified percentage, the 2014 Amendments generally require the MMF to institute a liquidity fee, unless the MMF’s board of directors (including a majority of the directors who are not interested persons of the fund) determines that imposing such a fee is not in the best interests of the MMF. When an MMF has a liquidity fee in effect, the fee reduces the proceeds received by all redeeming shareholders.
New procedure.
The new revenue procedure expands the scope of Rev Proc 2014-45 to reduce undue tax compliance burdens resulting from the new SEC rules. In Rev Proc 2014-45, the IRS provided an exemption from the wash sale rules only for certain MMFs. See IRS provides exemption from wash sale rules for redemption of money market fund shares (07/31/2014).
Under the new procedure, the IRS will not treat as part of a wash sale a redemption of a share in any MMF.
This means that the wash sale rules will not disallow the deduction for the resulting loss in the year realized and will not cause the basis of any property to be determined by reference to the basis of the redeemed shares.
The new procedure is effective for MMF shares redeemed after October 2, 2023.
For more inform information about the wash sale rules, see Checkpoint’s Federal Tax Coordinator ¶ I-3901.
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