The Internal Revenue Service (IRS) issued guidance to extend the wash sale relief to redemption of shares in money market funds (MMF). The IRS released Rev. Proc. 2023-35, which amplifies and supersedes Rev. Proc. 2014-45, which describes circumstances in which the IRS will not treat a redemption of shares in a MMF as part of a wash sale for purposes of section 1091. Specifically, Rev. Proc. 2023-35 extends wash sale relief to redemptions of shares in MMFs that maintain fixed share prices.
Generally, a wash sale occurs when a taxpayer sells a security (such as stocks or bonds) at a loss and then repurchases the same or substantially identical security within 30 days before or after the sale. Section 1091 contains rules governing wash sales and provides that if a taxpayer buys a substantially identical security within 30 days before or after selling it at a loss, the loss is not allowed for tax purposes. Instead, the taxpayer shall adjust the cost basis of the new security. This rule is designed to prevent taxpayers from engaging in tax-avoidance strategies by selling securities at a loss and then immediately repurchasing them.
The IRS granted the relief in Rev. Proc. 2023-35 in response to recent Securities Exchange Commission (SEC) rule changes for registered investment companies regarding liquidity fees that could result in losses on redemptions for most shareholders in stable net asset value (NAV) MMFs. The IRS noted that MMFs have historically tried to keep the prices at which their shares are distributed, redeemed and repurchased stable, without material fluctuations in the value of an MMF's portfolio on a per-share basis.
The IRS clarified in the recently released guidance that redemptions of shares occurring after 2 October 2023 in any MMF will not be treated as being part of a wash sale.