Investors who hold interest in money market funds are subject to specific tax rules. 

A money market fund (MMF) is a type of mutual fund that generally holds short-term and low risk securities such as cash or cash equivalents, with the result that shares in these funds have typically been issued, valued and redeemed at $1.00 per share, and therefore no gain or loss resulted when shares were redeemed. However, the Securities and Exchange Commission (SEC) issued final rules in July 2014 that would require certain MMFs to value securities using market-based factors (floating value) that could result in redeemed MMF shares producing a gain or loss.

In response to the SEC’s rules change, the IRS proposed regulations to simplify the recognition of gain or loss on floating-net asset value (NAV) MMF shares; the regulations were finalized, generally applicable to tax years ending on or after July 8, 2016. (Reg. Sec. 1.446-7; T.D. 9774, 7/7/16) Under the accounting method permitted and described in the regulations, aggregate gain or loss is determined for each “computation period,” and no gain or loss is determined for any particular redemption of a taxpayer’s shares in the MMF. Generally, under the NAV method, the net gain or loss for each computation period for the shares in an MMF to which the NAV method applies equals the ending value, minus the starting basis, minus the net investment in the MMF for the computation period. The net gain or loss for a tax year on shares in an MMF is the sum of the net gains or losses on shares in the MMF for the computation period or periods that make up the tax year. The final rules allow computation periods to be of equal or varying length whereas the proposed regs required them to be of approximately equal duration.

The proposed regs had allowed only floating-NAV MMFs to use the NAV method, while the final rules allow stableNAV MMFs to use the NAV method as well. Capital gains and losses determined under the NAV method are treated as short-term capital gains and losses. The final regs allow MMF shareholders to use different methods of accounting for shares in different MMFs or for shares in a single MMF held in different accounts.

Reg Sec 1.446-7(c)(8) provides that a change to or from the NAV method is a change in method of accounting and as such, the taxpayer will need to secure the consent of the Commissioner before changing accounting methods. Rev Proc 2016-39, issued as a companion to the final regs, provides that, under certain circumstances, such a change must be made under the automatic change procedures in Rev. Proc. 2015-13. Any such change will be made on a cut-off basis, and therefore no Sec 481(a) adjustment will be required or permitted.

In certain circumstances, Rev. Proc. 2016-39 permits taxpayers to change to the NAV method without filing a Form 3115, “Application for Change in Accounting Method.” This simplified procedure applies to a taxpayer that holds shares in a stable-NAV MMF and wants to change to the NAV method for a taxable year if (1) the taxpayer has not used the NAV method for shares in the MMF for any taxable year prior to the year of change, and (2) prior to the beginning of the year of change, either (a) the taxpayer's basis in each share of the MMF has been at all times equal to the MMF's target share price ($1 in most cases), or (b) the taxpayer has not realized any gain or loss with respect to shares in the MMF.

Brokers are not required to include the sale of NAV method shares on Form 1099-B for a sale of shares in a money market fund, effective for sales of shares in calendar years beginning on or after July 8, 2016 (i.e., 2017 for calendar year taxpayers). However, taxpayers and brokers can rely on the rules for sales of shares in calendar years beginning before July 8, 2016.

See chapter 2.5.