The IRS issued regulations finalizing proposed rules for a simplified method of accounting for gains and losses on shares in money-market funds (MMFs) and providing rules for information reporting of these amounts (T.D. 9774). MMFs are equity investments that generally seek to give investors short-term, stable, low-risk returns while maintaining a stable net asset value (NAV).
The new regulations were necessitated by SEC rules issued in 2014 that change how gains and losses on some MMFs are calculated. They finalize proposed regulations issued two years ago with a few changes in response to comments (REG-107012-14).
To enable taxpayers to adopt this new method of accounting more easily, the IRS also issued a revenue procedure detailing how the change in accounting method should be implemented (Rev. Proc. 2016-39).
Under the SEC rules, certain MMFs, called floating-NAV MMFs, must calculate gain or loss on the MMF shares using market factors and must round its price per share to the nearest basis point. The Treasury regulations implement this NAV method by calculating a taxpayer's gain or loss on MMF shares based on the change in the aggregate value of the taxpayer's shares during a computation period selected by the taxpayer and on the net amount of the purchases and redemptions during the computation period.
Government-security-focused MMFs and retail MMFs (the beneficial owners of which are limited to individuals) (collectively, stable-NAV MMFs) are not required to use the NAV method. However, the final regulations allow investors in stable-NAV MMFs to use the NAV method. This change from the proposed regulations was made in response to a comment that this would make it easier for individuals who had suffered a loss on their investment to keep track.
Another change in response to comments is a rule permitting MMF shareholders to use different accounting methods for shares they hold in different MMFs or for shares in a single MMF held in different accounts.
In response to a question about the differing reporting periods for MMFs and regulated investment companies (RICs) and their effect on the excise tax paid by RICs under Sec. 4982, the final regulations allow RICs to use the same accounting period for both computations as long as they consistently use both.
Accounting Method Change
Generally, accounting method changes require IRS consent. Taxpayers who wish to change to or from the NAV method of accounting should do so using the procedures in Rev. Proc. 2016-39. The change is done on a cutoff basis, meaning a Sec. 481 adjustment is not permitted or required. Taxpayers who qualify can file a short Form 3115, Application for Change in Accounting Method.
Taxpayers who are changing to the NAV method for shares in a stable-NAV fund (generally individuals) can change their method on their tax return without filing Form 3115.
The regulations and the revenue procedure apply to tax years ending on or after July 8, 2016.