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IRS Offers Tax Change to Ease SEC’s Money Fund Proposal

The U.S. Internal Revenue Service has proposed a change in tax rules to ease the impact on investors should the U.S. Securities and Exchange Commission force some money-market mutual funds to abandon their fixed $1 share price.

The plan, outlined in a notice posted July 3, would exempt small losses on the sale of money-fund shares from the wash-sale rule, which prohibits investors from recognizing a loss when selling a security if they repurchase the same security within 30 days.

“Tracking wash sales of money-market fund shares will present shareholders of floating-NAV money-market funds with significant practical challenges,” the agency said in the notice. “Therefore, it is in the interest of sound tax administration” to not treat redemptions from money funds as a wash sale, the IRS said.

SEC commissioners on June 5 approved a proposal aimed at making money funds less susceptible to runs that could destabilize the short-term credit markets in which they invest. One of the options in the proposal would require institutional funds that invest in corporate debt to drop their $1 share price for a floating price that tracks the market value of their holdings.

The IRS invited public comment on the proposal through Oct. 28. The plan falls short of addressing an industry concern that floating-value funds would introduce record-keeping burdens by making small gains and losses taxable transactions, Joan Swirsky, an attorney at Philadelphia law firm Stradley, Ronon, Stevens & Young LLP, said in an interview.

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