n-13-48.pdf

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Application of Wash Sale Rules to Money Market Fund Shares

Notice 2013-48

PURPOSE
This notice proposes a revenue procedure describing circumstances in which the
Internal Revenue Service (IRS) will not treat a redemption of shares in a money market
fund as part of a wash sale under § 1091 of the Internal Revenue Code. The proposed
revenue procedure provides that if a taxpayer realizes a loss upon a redemption of
certain money market fund shares and the amount of the loss is not more than a
specified percentage of the taxpayer’s basis in such shares, the IRS will treat such loss
as not realized in a wash sale.
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). 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.
REQUEST FOR COMMENTS
The Treasury Department and the IRS request comments on all aspects of the
proposed revenue procedure. Consideration will be given to any written public
comments that are submitted on or before October 28, 2013. A signed original and
eight (8) copies of public comments should be sent by mail to Internal Revenue Service,
CC:PA:LPD:PR (IRS Notice 2013-48), Room 5203, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Public comments also may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to the Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue, N.W., Washington, DC 20224, Attn:
CC:PA:LPD:PR (IRS Notice 2013-48). Comments also may be transmitted
electronically to the following e-mail address: Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2013-48” in both the subject line of the e-mail and the body of
the comment. All comments will be available for public inspection and copying.
DRAFTING INFORMATION
The principal author of this notice is Steven Harrison of the Office of Associate Chief
Counsel (Financial Institutions & Products). For further information regarding this
notice, contact Mr. Harrison at (202) 622-3930 (not a toll-free call).

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PROPOSED REVENUE PROCEDURE
SECTION 1. PURPOSE
This revenue procedure describes circumstances in which the Internal Revenue
Service (IRS) will not treat a redemption of shares in a money market fund (MMF) as
part of a wash sale for purposes of § 1091 of the Internal Revenue Code.
SECTION 2. BACKGROUND
.01 Money Market Funds
(1) An MMF is a type of investment company registered under the Investment
Company Act of 1940 (1940 Act) and regulated as a money market fund under Rule 2a-
7 under the 1940 Act (17 C.F.R. § 270.2a-7). Unlike other types of mutual funds, MMFs
have historically sought to keep stable (typically at $1.00) the prices at which their
shares are issued and redeemed. The types of securities that MMFs are permitted to
hold and the share-pricing and valuation methods specific to MMFs have made stable
prices possible.
(2) To be treated as an MMF, an investment company must meet the requirements
specified in Rule 2a-7, which, among other things, establishes limitations as to the
maturity, quality, diversification, and liquidity of an MMF’s investments. Generally, an
MMF must hold a diversified portfolio of short-term, low-risk securities. The securities
that an MMF holds generally result in no more than minimal fluctuations in the MMF’s
net asset value.
(3) Previously, an MMF meeting the requirements of Rule 2a-7(c) was permitted by
that provision to compute its price per share for purposes of issuance and redemption

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by using either or both of (a) the amortized cost method of valuation and (b) the penny-
rounding method of pricing. Under the amortized cost method, an MMF’s net asset
value is determined by treating the fund’s portfolio securities as having a value equal
not to their then-current fair market value but rather to their acquisition cost, adjusted for
amortization of premium or accretion of discount. Under the penny-rounding method,
an MMF’s net asset value per share is rounded to the nearest one percent. These
methods generally enabled MMFs to maintain constant share prices except in situations
in which the amortized cost method or penny-rounding method resulted in a variation in
share price that exceeded one-half of one percent (commonly called “breaking the
buck”).
(4) The perceived safety and simplicity of MMFs have led to their widespread use
as cash management vehicles. It is therefore common for investors to purchase and
redeem MMF shares frequently. An MMF is often used as a sweep account into which
cash is automatically deposited on a daily basis. MMFs generally declare dividends
daily and distribute them monthly. MMF shareholders typically reinvest these
distributions automatically in the MMF.
(5) The Securities and Exchange Commission (SEC) has limited the situations in
which an MMF is permitted to use the amortized cost method to those in which other
mutual funds are permitted to use this method. [Cite final SEC rules.] In addition, the
SEC has restricted the use of the penny-rounding method to government MMFs and

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retail MMFs.
1
In the case of an MMF that is neither a government MMF nor a retail
MMF, Rule 2a-7 now requires the MMF to value its portfolio securities using market-
based factors and to issue and redeem shares at a price that is rounded to the nearest
basis point, or one one-hundredth of one percent (basis point rounding).
2

(6) An MMF that uses market factors to value its securities and uses basis point
rounding to price its shares for issuance and redemption will have a share price that
changes frequently, or “floats” (a floating-NAV MMF). A floating-NAV MMF will
therefore resemble other mutual funds that are not MMFs, except for the restrictions on
the assets that an MMF is permitted to hold and the unique role that MMFs have
historically occupied.
(7) Constant share prices have simplified the taxation of MMF share transactions
because a shareholder does not realize gain or loss when a share is redeemed for an
amount equal to its basis. Shareholders will typically realize gain or loss, however, on
redemptions of floating-NAV MMF shares. In certain circumstances, a loss realized on
the redemption of an MMF share may implicate the wash sale rules of § 1091, as
discussed in section 2.02 of this revenue procedure.
(8) Sections 6045, 6045A, and 6045B establish certain reporting requirements
relating to securities. Each of those sections has an exception for an MMF that
stabilizes its share price at a constant amount that approximates its issue price or the

1
A government MMF is an MMF that maintains at least 80 percent of its assets in cash and certain
government securities and repurchase agreements. A retail MMF is an MMF that limits each
shareholder’s redemptions to $1 million per business day.
2
The SEC has also amended Rule 2a-7 to require every MMF to disclose daily the fund’s current net
asset value (NAV) per share rounded to the nearest basis point, but government and retail MMFs are not
required to use basis point rounding to issue and redeem shares.

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price at which it was originally sold to the public. See §§ 1.6045-1(c)(3)(vi), 1.6045A-
1(a)(1)(v), and 1.6045B-1(a)(5) of the Income Tax Regulations. A floating-NAV MMF
that does not stabilize its share price at a constant amount is not eligible for those
exceptions. Sections 6045, 6045A, and 6045B, however, also contain exceptions for
certain transactions involving exempt recipients, which include subchapter C
corporations and certain other entities. See §§ 1.6045-1(c)(3)(i), 1.6045A-1(a)(1)(iii),
and 1.6045B-1(a)(4). Most shareholders of floating-NAV MMFs are expected to be
exempt recipients, which will reduce reporting obligations for transactions in floating-
NAV MMF shares.
.02 Wash Sale Rules
(1) 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).
(2) Under § 1091(d), a taxpayer’s basis in the property the acquisition of which
resulted in the nondeductibility of a loss under § 1091(a) equals the basis of the stock or
securities disposed of, increased or decreased to take into account any difference
between the price at which the replacement property was acquired and the price at
which the original stock or securities were disposed of.

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(3) A shareholder that redeems shares in a floating-NAV MMF may realize a loss
on the redemption. Moreover, because many MMF shareholders engage in frequent
purchases of MMF shares (including purchases made as a result of sweep
arrangements and reinvestments of distributions), a shareholder that realizes a loss on
a redemption of MMF shares will often acquire shares in that MMF within 30 days
before or after the redemption.
(4) Redemptions of shares of MMFs, which have relatively stable values even
when share prices float, do not give rise to the concern that § 1091 is meant to address.
Moreover, given the expected volume of transactions in MMF shares, tracking wash
sales of MMF shares will present shareholders of floating-NAV MMFs with significant
practical challenges. Therefore, it is in the interest of sound tax administration to
prescribe circumstances in which the IRS will not treat a redemption of these MMF
shares as part of a wash sale under § 1091. Those circumstances are set forth in
sections 3 and 4 of this revenue procedure.
SECTION 3. SCOPE
This revenue procedure applies to a redemption of one or more shares in an
investment company registered under the 1940 Act if—
.01 The investment company is regulated as an MMF under Rule 2a-7 and holds
itself out to the public as an MMF; and
.02 At the time of the redemption, the investment company is a floating-NAV MMF.
SECTION 4. APPLICATION
.01 If a redemption is within the scope of section 3 of this revenue procedure and

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results in a de minimis loss, the IRS will not treat such redemption as part of a wash
sale. Therefore, § 1091(a) will not disallow the deduction for the resulting de minimis
loss in the year realized and § 1091(d) will not cause the basis of any property to be
determined by reference to the basis of the redeemed shares.
.02 Solely for purposes of section 4.01 of this revenue procedure, the term de
minimis loss means a loss realized upon a redemption of a share of stock of an MMF
the amount of which (expressed as a positive number) is not more than one half of one
percent (0.5%) of the taxpayer’s basis in that share.
.03 In determining whether a loss is a de minimis loss within the meaning of section
4.02 of this revenue procedure, a taxpayer must use the same basis determination
method and lot selection method under § 1012 and the regulations thereunder that the
taxpayer uses to determine the amount of its gain or loss for purposes of calculating
taxable income.
EXAMPLES
.01 Example 1
. (1) Fund is an MMF that meets the requirements of Rule 2a-7 under
the 1940 Act and holds itself out to the public as an MMF. Fund is a floating-NAV MMF
at all times during year 1. Before September 1 of year 1, Taxpayer, a domestic
corporation that is taxable under subchapter C of Chapter 1 of the Internal Revenue
Code, holds no shares of Fund. On September 1 of year 1, Taxpayer invests
$1,000,000.00 in Fund when Fund’s price per share is $1.0000, receiving in return
1,000,000 shares of Fund. On October 1 of year 1, Taxpayer invests an additional
$250,000.00 in Fund when Fund’s price per share is $1.0005, receiving in return

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249,875.06 shares, which Taxpayer holds in the same account. On October 15 of year
1, Taxpayer redeems $200,000.00 of Fund shares from the same account when Fund’s
price per share is $0.9980. Taxpayer engages in no other transactions in Fund shares
or any substantially identical shares or securities during year 1. Fund is a regulated
investment company within the meaning of § 1.1012-1(e)(5) and Taxpayer uses the
average basis method to determine the basis of its shares.
(2) Taxpayer’s average basis in each Fund share increased to $1.0001 when
Taxpayer purchased 249,875.06 shares on October 1 ($1,250,000.00 total purchase
price divided by 1,249,875.06 shares). Based on Fund’s market NAV on October 15,
Taxpayer redeemed 200,400.80 shares to receive $200,000.00 in proceeds. Taxpayer
therefore realizes a loss of $420.83 on the October 15 redemption (proceeds of
$200,000.00 minus basis of $200,420.83 in redeemed shares), or a loss of $.0021 per
share (proceeds of $.9980 per share minus basis of $1.0001 per share). This loss is a
de minimis loss under section 4.02 of this revenue procedure because the loss of
$.0021 per share is less than $.0050 per share (.5% of $1.0001). Therefore, under
section 4.01 of this revenue procedure, the IRS will not treat the loss on each Fund
share as subject to current disallowance under § 1091.
.02 Example 2
. (1) The facts are the same as in Example 1, except that Fund’s price
per share at the time of the October 15 redemption is $0.9940.
(2) As in Example 1, Taxpayer’s average basis in each Fund share is $1.0001 after
the second purchase. Based on Fund’s market NAV on October 15, Taxpayer
redeemed 201,207.24 shares to receive $200,000.00 in proceeds. Taxpayer therefore

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realizes a loss of $1,227.36 on the October 15 redemption (proceeds of $200,000 minus
basis of $201,227.36 in redeemed shares), or a loss of $.0061 per share (proceeds of
$.9940 per share minus basis of $1.0001 per share). Because the loss of $.0061 per
share is more than $.0050 per share (.5% of $1.0001), Taxpayer’s loss is not a de
minimis loss under section 4.02 of this revenue procedure and is subject to current
disallowance under § 1091. The entire loss is disallowed under § 1091(a) because
Taxpayer purchased more than 201,207.24 shares on October 1.
(3) Taxpayer’s basis in its Fund shares after the application of § 1091(a) is
determined as follows. First, Taxpayer’s basis in 201,207.24 of the 249,875.06 shares it
purchased on October 1 is increased to $202,454.71 (Taxpayer’s $201,227.36 basis in
the sold shares, increased by $1,227.36, which is the difference between the
$201,227.36 basis in the replacement shares and the $200,000.00 received for the sold
shares). Second, the average basis of all Fund shares held by Taxpayer is determined
by dividing Taxpayer’s total basis in its Fund shares of $1,050,000.00 (the sum of the
$202,454.71 basis in the replacement shares computed above and the $847,545.29
basis in the remaining 847,460.58 shares) by Taxpayer’s total remaining Fund shares of
1,048,667.82. Accordingly, Taxpayer’s average basis in each Fund share on October
15, year 1 is $1.0013.
SECTION 5. EFFECTIVE DATE
[RESERVED]

SECTION 6. DRAFTING INFORMATION
The principal author of this revenue procedure is Steven Harrison of the Office of
Associate Chief Counsel (Financial Institutions & Products). For further information
regarding this revenue procedure contact Mr. Harrison at (202) 622-3930 (not a toll free
call).

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