Money Market Funds: Gains and Losses

If you stash some of your savings in money market funds, you probably take for granted that the share price is always $1. Keeping the value stable even though the price of the fund’s underlying investments varies makes these accounts “feel” like a regular bank account.

However, with the exception of a period in 2008 and 2009, money market funds are not insured by the federal government the way regular bank accounts are. That guarantee was an exception, and happened only because certain funds had liquidity issues and “broke the buck,” meaning the redemption price sank below $1.

Over the summer, in an effort to avoid a repeat of 2008-2009, the Securities and Exchange Commission decided to let certain money market funds price their shares based on the underlying value of the fund’s assets. Most of the rules requiring these funds to report a “floating” net asset value will be implemented over the next two years.

Once the rules take effect, depositing and withdrawing money from what you might have considered a “checking” account could instead generate capital gains or losses — and potentially make your transactions subject to the wash sale rules.

As you probably know, the wash sale rules prohibit recognition of certain losses from investment sales. Specifically, you can’t claim a loss on your federal income tax return for the sale of a stock or security when you buy a substantially similar asset within 30 days before or after the sale date. Instead, the loss changes your basis.

The IRS has issued a revenue procedure in response to the SEC rules. The procedure provides an exemption from the wash sale rules for certain money market accounts and a simplified method for calculating gains and losses on those accounts.

We’ll keep you informed as the new rules take effect. If you have questions about the interplay between your investments and your taxes, please call.