The Internal Revenue Service has floated guidance to address a tax law concern about rules proposed by the Securities and Exchange Commission that could require money market funds to move to floating net asset values.

The guidance, which appears in Notice 2013-48 proposed by the IRS on Wednesday, describes the circumstances under which the IRS would not treat a redemption of shares in a money market fund with a floating net asset value as part of so-called wash sale, for which the investor could not recognize losses.

The money market fund industry and state and local governments oppose requiring money market funds to move to floating NAVs and the SEC has not even adopted its rules, but already the IRS is trying to resolve concerns raised about them.

“This proposed guidance is intended to mitigate tax compliance burdens that may result from proposed changes in the rules that govern the prices at which certain money market fund shares are issued and redeemed,” the IRS said in the notice.  The IRS is asking for public comments on its proposed tax guidance by Oct. 28.

The IRS’ wash sale rules, which already exist, are designed to prevent investors from engaging in manipulative trading in money market funds, such as by redeeming shares to recognize a loss and then almost immediately buying the shares back. Those rules do not allow an investor to recognize a loss on a sale of shares if the sale occurs 30 days before or 30 days after substantially the same shares are purchased. The losses can only be recognized upon final disposition of the shares.

The wash sale rules have not affected money market funds, which currently have stable net asset values of $1 per share because shareholders do not have gains or losses when redeeming shares.

But if the SEC begins requiring money market funds to have floating NAVs, then the wash sale rules would come into play.

Under the tax guidance proposed Wednesday, if an investor sells shares within 50 basis points of the purchase price, it can recognize the loss for tax purposes. However if the loss is over 50 basis points of the purchase price, the loss would be disallowed until the final disposition of the shares.

The SEC proposed its rules on June 5 and public comments on them do not have to be filed until September. The rules are designed to make money market funds less susceptible to runs, such as those that occurred in 2008 when Reserve Primary Fund “broke the buck” and investors pulled nearly $300 billion from other prime money market funds.

The SEC proposed two alternatives, either or both of which could be adopted.

The first would require all prime money market funds to have floating net asset values. The other would allow a money market fund to use a stable NAV, but would require it to impose a 2% liquidity fee if its weekly liquid asset level falls below 15% of the assets, unless its board determined this was not in the best interest of the fund. After falling below the 15% weekly liquid asset threshold, the fund’s board would be able to temporarily suspend redemptions for up to 30 days.

The floating NAV requirement would not apply to retail money market funds, which the SEC has proposed defining as funds that limit each shareholder’s redemptions to $1 million per business day. The redemption fee and gate provisions would not apply to government funds, defined as those holding at least 80% of their assets in cash, government securities, or repurchase agreements collateralized with government securities. Government securities mean U.S. securities, sources have said.

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