Tax Facts

7953 / How is a money market fund shareholder taxed?

Updated: October 02, 2024 at 02:01 PM

Because a money market fund is a mutual fund, its shareholders are taxed in the manner discussed in Q 7938 through Q 7951.Money market funds ordinarily do not have capital gain dividends because of their general policy of investing in short-term securities. Note that money market fund dividends are not qualified dividends and, thus, do not qualify for the lower tax rates (20%/15%/0%) (see Q 702).


Money market funds (MMFs) that are neither government MMFs nor retail MMFs must value portfolio securities using market-based factors and compute their price per share by rounding the fund’s net asset value (NAV) to a minimum of the fourth decimal place (or, for MMFs with a share price other than $1.0000, an equal or greater level of precision).

These MMFs have a share price that is likely to change often, but within a narrow range due to the limited types of investments that MMFs may hold (potentially generating a loss). The wash sale rule disallows a loss realized on a sale or disposition of stock or securities if, within a period beginning 30 days before and ending 30 days after, the taxpayer acquires, or enters into a contract to acquire, substantially identical stock or securities. Because many MMF shareholders engage in frequent redemptions and purchases of MMF shares (e.g., due to sweep arrangements and automatic reinvestments), 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.

In Revenue Procedure 2023-35, the IRS extended the wash sale relief that it had already provided to shares in floating-NAV MMFs and will not treat a redemption of a share in any MMF as part of a wash sale.


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