Wash Sale Rules Have Now Eased for Money Market Funds

The IRS’s recently issued Rev. Proc. 2023-35 states that wash sale rules will no longer apply to the sale of shares in money market funds. The new guidance, effective Oct. 2, makes these investments an easier decision by simplifying the tax preparation of MMF transactions and eliminating IRS enforcement of wash sale rules on MMF sales.

A wash sale happens when a security is sold at a loss and an identical purchase is then made within 30 days. Though losses in MMFs are generally rare, this change means investors will be able to use sale losses to offset other capital gains and/or up to $3,000 of ordinary income, in the year the loss is realized. This new guidance extends the wash sale relief from the previous Rev. Proc. 2014-45 to MMFs with stable net asset values, where the prior guidance provided wash sale relief to investors in MMFs with a floating NAV.

Traditionally, MMFs have a NAV per share price of $1, which means investors can normally buy and sell those funds and not be concerned about creating a taxable event. Because the purchase price of these funds generally match the selling price, having a loss in these funds hasn’t been an issue for most investors, and the wash sale rules were of no real concern.

However, an investor can actually see a loss in a MMF. Though rare, “breaking the buck” sometimes happens when the NAV per share price goes below $1. This can trigger a mad rush of investors out of a fund, causing liquidity issues for the fund manager.

For example, during the 2007-2008 financial crisis, the Reserve Primary Fund ended up “breaking the buck” (dropping below $1) when its NAV per share fell to 97 cents. The fund was overwhelmed by sellers trying to get their money out and was eventually forced to liquidate.

To address the MMF liquidity issues that can occasionally happen during a financial crisis or a global event such as the pandemic, the Securities and Exchange Commission in 2021 amended the rules governing MMFs to allow them, or in some cases require them, to institute a liquidity fee if redemptions reach a certain level. The intent is to discourage large redemptions during a financial crisis or an event that causes a liquidity crunch.

These liquidity fees create the potential for investors to realize losses on MMF sales, because the fees reduce the proceeds paid to the investor when selling out of the fund. It’s now possible to sell shares in a MMF and realize a loss, even if the NAV per share hasn’t broken the buck. As a result, we could see more wash sales among MMF investors if these fees are charged during a large redemption.

To alleviate the problem of MMF investors having to face the complexity of the wash sale rules, the IRS issued Revenue Procedure 2023-35 to “reduce undue tax compliance burdens” and “because of the constant value of shares in stable-NAV MMFs, the frequency with which many taxpayers continuously acquire and redeem shares in these MMFs, and the administrative and compliance burdens that would flow from applying section 1091 to these transactions.”

Overall, this new guidance is a win for all parties involved. The wash sale rules weren’t designed to punish individuals for getting out of an investment; they aim to stop people from selling investments to simply receive a tax benefit from a loss.

Most people don’t use MMFs to generate losses—they’re a cash equivalent asset normally purchased because they’re generally safe, liquid assets that can potentially generate a better return than a bank account.

Though the likelihood of losses from a MMF transaction is still very low, the latest IRS guidance helps remove some potential complications and concerns investors could face if a fund did break the buck or charged a liquidity fee for a redemption. It also means that tax professionals and financial advisers won’t need to worry about telling clients about the complexities of the wash sale rules when it comes to investments in MMFs.

It’s doubtful the IRS change to the wash sale rules will apply to other asset classes. This change was prompted by the SEC’s amendments to Rule 2a-7, and unless there are plans by some other regulatory agency to make changes to other investment vehicles, we likely won’t see other changes to how the wash sale rules are applied any time soon.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Hayden Adams is director of tax and wealth management at Charles Schwab. He provides analysis and insights on income tax planning, tax-efficient investing, asset allocation, retirement withdrawal strategies, and other topics.

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