Proposed De Minimis Exception to Wash Sale Rules for Certain Money Market Fund Redemptions
A focus on asset managers
On July 3, 2013, the IRS released Notice 2013–48, which proposes a revenue procedure stating that the Internal Revenue Service (IRS), under certain circumstances, will not enforce the "wash sale" rules on losses from redemptions of money market fund (MMF) shares. For this purpose, a MMF is an investment company that is regulated as a MMF under Rule 2a–7 of the Investment Company Act of 1940 (the 1940 Act) and which, at the time of the redemption, is a floating net asset value (NAV) MMF. This proposed guidance is intended to mitigate tax compliance burdens that may result from proposed changes in the rules that govern the prices at which certain money market fund shares are issued and redeemed. The Securities and Exchange Commission (SEC) has issued proposed regulations to effect these changes. See Money Market Fund Reform, Securities Act Release No. 9408, Investment Advisors Act Release No. 3616, Investment Company Act Release No. 30,551, 78 Fed. Reg. 36834 (proposed June 5, 2013).
Summary of the proposal
The proposed revenue procedure initially applies to losses on redemption of shares of a MMF with a floating NAV. The proposed revenue procedure is drafted as if the SEC had already adopted final rules addressing floating net asset value in substantially the same form as the proposed rules. If those rules are not adopted in substantially the same form as they have been proposed, the revenue procedure proposed by this notice may not be adopted or may be adopted in materially modified form.
Generally, Internal Revenue Code (IRC) Section 1091(a) disallows a loss realized by a taxpayer on a sale or other disposition of shares of stock or securities if, within a period beginning 30 days before and ending 30 days after the date of such sale or disposition, the taxpayer acquires (by purchase or by an exchange on which the entire amount of gain or loss is recognized by law), or enters into a contract or option to so acquire, substantially identical stock or securities (unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business).
Redemptions of shares of MMFs, which have relatively stable values even when share prices float, do not give rise to the concern that IRC Section 1091 is meant to address. Under the proposed revenue procedure, should a redemption of MMF shares result in a de minimis loss, then the IRS will not treat such redemption as part of a "wash sale." A de minimis loss for purposes of the proposed revenue procedure is defined as a loss upon a redemption of stock of a MMF the amount of which is not more than one half of one percent (0.5%) of the taxpayer’s basis in that share. Additionally, a taxpayer must use the same basis determination method and lot selection method under IRC Section 1012 and the regulations thereunder that the taxpayer uses to determine the amount of its gain or loss for purposes of calculating taxable income.
The IRS is requesting written comments on all aspects of the proposed revenue procedure be submitted by October 28, 2013. Notice 2013–48 will be published on July 29, 2013 in the Internal Revenue Bulletin 2013–31. We will continue to share further insights as developments unfold.
For additional information or questions, please contact:
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165
National Tax Managing Director, Regulated Investment Companies
Deloitte Tax LLP
+1 973 602 6710
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