The Treasury Department and IRS today released guidance—final regulations (T.D. 9774) and Rev. Proc. 2016-39—concerning the treatment of gains or losses with respect to redemptions of shares in floating net asset value (floating-NAV) money market funds. The treatment under the final regulations also applies to stable-NAV money market funds.
The U.S. Securities and Exchange Commission in July 2014 voted to require certain money market funds to price shares in a manner that more accurately reflects the market value of the funds’ underlying portfolios. As such, these money market funds were no longer be able to use certain rules that had allowed them to maintain a stable net asset value (NAV). Instead, the share price would “float”—so the funds will be known as “floating-NAV” money market funds.
If a shareholder frequently purchases and redeems shares (e.g., when the fund is used as a “sweep arrangement”), the shareholder could experience a high volume of small gains and losses. As such, tax compliance could be difficult and burdensome if these taxpayers had to ascertain the cost basis and gain or loss for each transaction. To address these issues, the IRS and Treasury in July 2014 issued proposed regulations and Rev. Proc. 2014-45 to provide a simplified, aggregate annual method of tax accounting for these gains and losses.
The proposed regulations allowed shareholders to measure net gain or net loss without transaction-by-transaction calculations, thereby simplifying tax compliance for shareholders. As a result, shareholders could determine their net gain or loss using information that the funds routinely provide to them for non-tax purposes. In particular, the net gain (or loss) generally is determined as:
The guidance also provided to floating-NAV money market funds the same waiver of gross-proceeds reporting, basis reporting, and holding-period reporting rules that applied to stable-value money market funds.
Under the 2014 revenue procedure, the IRS said it will not treat a qualifying redemption of a floating-NAV money market fund share as part of a “wash sale” under section 1091.
With today’s release, the IRS and Treasury are finalizing—with certain changes and clarifications—the regulations that were proposed in July 2014.
The final regulations provide a taxpayer may adopt the NAV method for shares in a floating-NAV money market fund for the first tax year which the taxpayer holds the shares in the money market fund and that money market fund is a floating-NAV money market fund. For taxpayers seeking a change to or from the NAV method, the IRS today issued Rev. Proc. 2016-39 setting forth the procedures by which a taxpayer may obtain automatic consent of the IRS Commissioner to change to or from the NAV method.
In some instances, Rev. Proc. 2016-39 provides a “simplified method” and permits taxpayers to change to the NAV method on a federal tax return without having to file Form 3115, Application for Change in Accounting Method. For other changes, the automatic consent procedures require a “short” Form 3115.
The final regulations will be published in the Federal Register on Friday, July 8, 2016. The final regulations concerning the NAV method apply to tax years ending on or after July 8, 2016.
For tax years ending on or after July 28, 2014, and beginning before July 8, 2016, shareholders of money market funds may rely on the rules concerning the NAV method in the proposed or final regulations.
The provisions of the final regulations concerning information reporting apply to sales of shares in 2017 and later (i.e., calendar years beginning on or after July 8, 2016). Taxpayers and brokers may rely on the regulations for information reporting for sales of shares in calendar years beginning before July 8, 2016.
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.