TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, June 27, 2012

Tax Consequences of Breaking the Buck in Money Market Mutual Funds

In the New York Times Deal Book, Steven Davidoff (Ohio State) dismisses claims in this industry-sponsored paper that the proposal to price mutual fund money market accounts by their net asset value rather than a fixed dollar per share would "generat[e] minor taxable capital gains or losses, leading to nightmarish complexity for tax calculations." Stephen Bainbridge (UCLA) responds in Money Market Reform and Taxes:

[G]iven the minuscule returns money market funds are paying these days, I probably would stop using them and just leave my rainy day savings/cash flow management funds in my checking account rather than trying to deal with headaches come tax time of having a constantly fluctuating NAV. Who wants to deal with paying taxes on, say, 10 cents worth of capital gains because you sold 1000 shares at $1.00 and had a basis in those shares of $0.9999? And what if you want to use actual cost basis instead of average cost basis? Maybe it'd be worth doing if you're a billion dollar institution, but my guess is that a floating NAV would drive retail investors out of the money market industry.

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