BlackRock's "Cash Academy" released a video and white paper on "Simplified Tax and Accounting Rules for Money Market Funds. The paper explains, "Regulators finalized much-anticipated and angst-inducing tax and accounting rules for money market funds (MMFs), and in doing so offered a few key modifications that we think will benefit investors. On July 8, 2016, the Internal Revenue Service (IRS) issued final regulations permitting the simplified "Net Asset Value, or NAV, method" of accounting for gains and losses in MMFs (IRS Regulation T.D. 9774), and provided guidance regarding requirements for information reporting via Form 1099-B. The final regulations are similar to the IRS' proposal released in July 2014, with a few small modifications."
The piece explains, "BlackRock believes MMFs and shareholders will benefit from the following simplification measures: Relief from the wash sale rule (IRS Revenue Procedure 2014-45, released in July 2014) , excluding investors in floating NAV (FNAV) MMFs from having to compute or track wash sale adjustments; The assurance that MMFs will continue to be treated as cash equivalents (Securities and Exchange Commission (SEC) Section 220 of the Codification of Financial Reporting Policies, released as a part of the 2014 Rule 2a-7 reforms); and, The exemption from the information reporting requirements of Form 1099-B. We believe that collectively, these rules will ease potential tax or accounting challenges the FNAV environment may have created for cash investors."
It continues, "Prior to the SEC's July 2014 amendments to Rule 2a-7, all MMFs transacted at a constant net asset value (CNAV) per share, which meant there was no need to determine, monitor, or pay taxes on gains and losses on individual shares. With institutional prime and institutional municipal MMFs adopting FNAV per share pricing, there is the possibility for small gains and losses to be realized on individual shares as they are purchased or redeemed. The NAV method does not change the tax treatment of dividends paid by FNAV MMFs. It is important to note that cash investors that do not elect the NAV method will be required to track the basis of FNAV MMF shares and calculate gains and losses themselves."
BlackRock comments on MMFs' "Continued classification as cash equivalents," saying, "The SEC confirmed in 2014 that any fluctuations in the amount of cash an investor would receive upon redemption from a FNAV MMF would likely be small and therefore would be "consistent with the concept of a 'known' amount of cash." This significant clarification confirms that both CNAV and FNAV MMFs can continue to receive the same accounting treatment as cash (i.e. be considered "cash equivalents") under the U.S. Generally Accepted Accounting Principles for bookkeeping purposes."
Finally, on "Easing the tax and accounting uncertainty for MMF investors," the paper tells us, "MMF investors have long chosen this investment vehicle for its relative ease of use and access to liquidity. The introduction of the FNAV pricing for certain types of MMFs left many in the industry wary of the potential for onerous tax and accounting requirements related to this change. The relief provided 2a-7 MMFs under these new regulations is not available to investors in longer duration funds such as short-term bond funds. These longer duration funds are not eligible for the NAV method, and will remain subject to wash sale rules, 1099-B reporting, and may not be considered cash equivalents. We are supportive of these measures outlined above, as we believe they help maintain the benefits and utility of MMFs for investors who have historically valued the relative simplicity and liquidity of this important investment vehicle."
In the video, BlackRock Cash Management MD `Britta Hion tells us, "Today I'll be discussing simplified tax and accounting rules for money market funds, finalized by the Internal Revenue Service in July 2016. We believe these rules should help maintain the utility of money market funds for cash investors. They are principally intended to simplify the process for cash investors utilizing floating net asset value money market funds."
She explains, "In this video, we focus on the application of the NAV method for calculating gains and losses over an investment period for floating net asset value money market funds. Applying these rules to your investment situation may require a review of your policies, and we recommend that you have a conversation with your tax advisor or auditor to discuss the impact of investing in these types of money market funds."
Hion continues, "The NAV method provides investors the ability to report, for tax purposes, their aggregated net gains and losses over a period. That period could represent the investor's tax year, or a shorter period as necessary. Let's walk through a hypothetical calculation.... The calculation begins with the investment balance at the end of your period. Subtract from your end balance what your balance is at the beginning of the period you have elected. Again, this could be your fiscal year, quarter, month, or otherwise. Subtract out the sum of all your transactions during that period. The amount you are left with is the net realized gain or loss for that period, which would be treated as a short-term capital gain or loss."
She adds, "The NAV method does not change the tax treatment of dividends paid by floating NAV money market funds. It is important to note that cash investors that do not elect the NAV method will be required to track the basis of floating NAV money market fund shares, and calculate gains and losses themselves. Although we focus on a floating NAV money market fund in this illustrative calculation, investors can use the NAV method on constant NAV money market funds as well."
The video says, "Clients are inquiring about where to report gains or losses for floating NAV money market funds in their accounting records. The final decision on where to report is up to the investor, who should consult with their tax and accounting advisors for input. We expect most investors to report as part of net operating income, but this will depend on your investment situation."
It adds, "Lastly: We also have clients asking about which accounting method classification to use for floating NAV money market funds. We expect the Financial Accounting Standards Board, or FASB, to require floating NAV money market funds be classified as Available for Sale. This is still pending finalization, but the Hold to Maturity classification typically requires amortized cost accounting."
