Money Market sales taxable?

From: "Andrew DeFaria"

| I started some non-retirement investing this year. At the brokerage you put money into the | account and "money market" shares are purchased at a straight $1 = 1 share rate. Later, | when you actually invest in something, a mutual fund or stock, shares of this money market | are sold and your mutual fund or stock is purchased. | | Importing to TurboTax for the Web creates an Investment Sales Summary for the sales of | these money market shares. Do I need to pay taxes on this?!? |

Plaese ask a licensed tax advisor, the IRS or lawyer.

I hope you expect a similar response when you post for assistance on a topic you care about.

I started some non-retirement investing this year. At the brokerage you put money into the account and "money market" shares are purchased at a straight $1 = 1 share rate. Later, when you actually invest in something, a mutual fund or stock, shares of this money market are sold and your mutual fund or stock is purchased.

Importing to TurboTax for the Web creates an Investment Sales Summary for the sales of these money market shares. Do I need to pay taxes on this?!?

-- Andrew DeFaria The careful application of terror is also a form of communication.

Andrew DeFaria wrote in news:XfqdnSbGqITwj3vYnZ2dnUVZ snipped-for-privacy@comcast.com:

As far as I know, buying or selling is not in itself taxable. What is taxable is any dividends you get as interest on your investments (most MMF do give a small amount of interest), and of course, capital gains. MMF avoid that by keeping the value of their shares at $1/share, so it is unlikely that you get a cap gain from a MMF sale.

Buy/Sells of the MM may show up on Sched D in TTax - but with zero gain/loss. Check this by running QW's Capital Gains Report. The FI probably will not report these and I delete them.

These Buy/Sells will also inflate the Gross Proceeds in TTax vs what the FI reports. The Gross Proceeds will automatically adjust as you delete these transactions and, when done, you should match what the FI reports to the IRS.

Bottom line - I make sure QW/TTax matches the year-end Form 1099's.

You need to consult a tax expert or the IRS to confirm, but MMF sales are not, AFAIK, subject to capital gains taxes. What *IS* taxable are the dividends that you get each month. BTW, they are *dividends*, not

How is the account set up? Frankly, I've never considered the import from TT into Q to be worth the effort to make it reliable...

Regards, Hank Arnold

Andrew DeFaria wrote:

Hi, Andrew.

It SHOULD work quite simply.

You put in $1,000 and the broker buys 1,000 shares at $1 each. Each day, the fund manager calculates how much the fund has made that day and pays a dividend - in shares at $1 per share, not in cash - equal to that day's earnings. The next day, there's a new dividend, and the next day... By the time you sell some shares to invest in a stock (Intuit ?), your MMF may have grown to 1,050 shares at $1 each for a total value of $1,050. You need $800 to pay for the INTU, so your broker sells 800 shares of your MMF at $1 per share, leaving you with 250 shares worth $1 each. Like I said, it's quite simple.

Now, it gets complicated - UNnecessarily - when the broker reports the sale of the 800 shares as though they were shares of IBM or Google, for which the price is NOT fixed at $1 per share. The same thing happens when your CD (Certificate of Deposit) matures and the bank reports that you SOLD an investment. Maybe you put in $10,000, it earned $400 interest, which was compounded and added to the principal, so your check at maturity was for $10,400. The bank might report that you sold a CD for $10,400.

In either case, there is a ZERO capital gain. In either case, the interest or dividend earned should be reported, separately from the sale, as interest or dividend income. (Probably taxable, but that's a separate topic.) The income would increase the tax basis of the MMF or of the CD to the value at the time of sale. Therefore, the gain or loss will always be ZERO.

Reporting the zero gain is entirely proper. Omitting it is also entirely proper. The definition of Gross Income includes the GAIN on sale of securities, not the gross proceeds of such sale. So report the MMF sale as $800 proceeds less $800 adjusted basis leaving $0 gain - or omit it from your return entirely. Your tax will be the same either way.

In my opinion, brokers and banks should not be required to report such sales, but the government doesn't let me make the rules. And Intuit doesn't let me program Quicken or TurboTax, either.

RC

Money market shares are bought at $1 and sold at $1. So there's no gain or loss and you don't need to pay taxes on it.

Second question: Do you need to report it on your tax return anyway? The answer is, look at the 1099-B form your brokerage house sends. You will not see the money market sales reported on it, so no, you shouldn't report that on your schedule D.

(Your tax return should match what is reported to the IRS. Otherwise the IRS could get curious, which is bad. So it's a good idea to compare your 1099-B totals with the totals of your capital gains transactions. If I have a lot of transactions, I export my capital gains report from Quicken and use Excel to tote things up. If I have a substantial difference, I attach an explanatory note to my return.)

Third question: If you don't need to report it on your tax return, why is Quicken putting it in your capital gains report?

Most of my brokerage accounts don't report money market transactions to my Quicken. As I recall, Quicken help says that that is up to the financial institution. There's something that's supposed to come up when you create the account, where you can designate a fund as the

Money market shares are bought at $1 and sold at $1. So there's no gain or loss and you don't need to pay taxes on it.

Second question: Do you need to report it on your tax return anyway? The answer is, look at the 1099-B form your brokerage house sends. You will not see the money market sales reported on it, so no, you shouldn't report that on your schedule D.

(Your tax return should match what is reported to the IRS. Otherwise the IRS could get curious, which is bad. So it's a good idea to compare your 1099-B totals with the totals of your capital gains transactions. If I have a lot of transactions, I export my capital gains report from Quicken and use Excel to tote things up. If I have a substantial difference, I attach an explanatory note to my return.)

Third question: If you don't need to report it on your tax return, why is Quicken putting it in your capital gains report?

Most of my brokerage accounts don't report money market transactions to my Quicken. As I recall, Quicken help says that that is up to the financial institution. There's something that's supposed to come up when you create the account, where you can designate a fund as the "cash" in the account. I've never seen that myself.

In my one account that does pass Quicken the money market transactions, I delete each money market buy and sell and carry it as a cash balance, which is a real pain to do but it comes out right.

The other way to make the tax import come out right is to use one security type or asset class for your money market funds, customize a captial gains report to exclude that type or class, export the report to a TXF file and import that file into Turbo Tax. And don't check off the capital gains when you import everything else directly from Quicken.

I started some non-retirement investing this year. At the brokerage you put money into the account and "money market" shares are purchased at a straight $1 = 1 share rate. Later, when you actually invest in something, a mutual fund or stock, shares of this money market are sold and your mutual fund or stock is purchased.

Importing to TurboTax for the Web creates an Investment Sales Summary for the sales of these money market shares. Do I need to pay taxes on this?!?

-- Andrew DeFaria The careful application of terror is also a form of communication.

Hi, Steve.

We have to be careful not to confuse money market ACCOUNTS with money market FUNDS.

Banks offer MMAs, which are simply interest-bearing checking accounts, with the interest rate fluctuating by reference to the money market. Earnings from MMAs are interest, and are reported as such on the 1099-INT.

MMFs are a special type of mutual funds, with the price held at $1. The fund manager invests the accumulated deposits into very short-term money market instruments, collecting interest and making gains (we hope) on sales of those assets. Each day the fund manager determines how much profit was made that day, then declares a dividend of that amount - payable in stock at $1 per share, not in cash. Each fund shareholder's dividends are reported as dividends on the 1099-DIV.

Andrew's question related to shares of a money market fund. He may also earn interest on uninvested cash in his account. But those are two different kinds of income and are reported separately.

RC