Money market funds produce two types of taxable income that you report as ordinary income

Money market funds pay you interest, and that interest is taxed as ordinary income — the same tax rate as your wages or salary. The fund also sometimes distributes capital gains, which can be taxed differently depending on how long the fund held the investment. Most of the time, though, you are dealing with interest income, which is straightforward: you receive a 1099-DIV form from the fund company, and you report that interest on your tax return.

The tax bill arrives every year, even if you did not withdraw any money. The IRS taxes you on the income the fund earned on your behalf, whether it paid that income out to you in cash or reinvested it back into the fund. This is different from a savings account at a bank, where the bank reports interest on a 1099-INT form instead — but the tax treatment is the same.

Key Takeaways

  • Interest income from money market funds is reported on Form 1099-DIV and taxed as ordinary income at your full tax rate.
  • You owe tax on the interest in the year the fund earned it, even if you reinvested the money instead of taking it out.
  • Short-term capital gains from money market funds (gains on securities the fund held less than one year) are taxed as ordinary income.
  • Long-term capital gains (on securities held more than one year) may be taxed at lower rates, but money market funds rarely hold securities that long.
  • Tax-exempt money market funds exist and report income on Form 1099-DIV as well, but the interest is not subject to federal income tax.

Where the interest income appears on your tax return

The money market fund sends you a 1099-DIV form by January 31 of the year after the income was earned. This form shows the interest you earned in a box labeled "Ordinary Dividends" or sometimes just "Dividends." Despite the word "dividends," this is interest income, not stock dividends — the IRS uses "dividend" as a catch-all term for distributions from funds.

You report this amount on Schedule B (Interest and Ordinary Dividends) if your total interest and dividend income for the year is more than $1,500. If it is $1,500 or less, you can report it directly on Form 1040, line 7b. Either way, the income flows to your taxable income total and is taxed at your ordinary income tax rate — the same rate as your paycheck.

If you own the money market fund inside a retirement account like a 401(k) or traditional IRA, you do not receive a 1099-DIV and you do not pay tax on the interest that year. The tax is deferred until you withdraw money from the account. If the fund is in a Roth IRA, the interest is never taxed at all.

Capital gains from money market funds are rare but still taxable

Money market funds occasionally sell securities at a profit, and when they do, they distribute those gains to you. The 1099-DIV form shows these in a separate box: "Short-Term Capital Gains" or "Long-Term Capital Gains." Short-term gains (from securities the fund held one year or less) are taxed as ordinary income. Long-term gains (from securities held more than one year) may be taxed at lower rates — 0%, 15%, or 20%, depending on your income.

In practice, money market funds hold very short-term securities — often maturing in days or weeks — so long-term capital gains are uncommon. Most of what you see on the 1099-DIV is interest income in the "Ordinary Dividends" box. But if the fund does report capital gains, you report them on Schedule D (Capital Gains and Losses) along with any other investment gains or losses you had that year.

Tax-exempt money market funds work differently

Some money market funds invest in municipal bonds — bonds issued by states, cities, and local governments. The interest from these bonds is exempt from federal income tax. These funds still send you a 1099-DIV, but the interest is reported in a box labeled "Tax-Exempt Interest" instead of "Ordinary Dividends."

You do not report tax-exempt interest on your tax return at all — you skip it entirely. However, the IRS still wants to know you received it, so some forms require you to list it on a line that says "tax-exempt interest" but does not add it to your taxable income. Check your specific form instructions or ask a tax preparer if you are unsure where to report it.

Tax-exempt funds typically pay lower interest rates than taxable money market funds because the tax break makes them attractive to investors in high tax brackets. Whether a tax-exempt fund makes sense for you depends on your tax rate and how much interest the fund pays.

When you sell shares of a money market fund, you may have a capital gain or loss

The interest the fund pays you is one type of taxable event. Selling your shares is another. If you bought the fund at $10 per share and sold it at $10.05, you have a short-term capital gain of $0.05 per share. If you held the shares more than one year before selling, it is a long-term gain and may be taxed at a lower rate.

Money market fund share prices are almost always exactly $1.00, so you rarely have a gain or loss when you sell. But if you bought shares when the fund was worth slightly more or less than $1.00, or if you bought at different times and are selling only some of your shares, you need to track your cost basis — the price you paid — to calculate the gain or loss correctly.

Report the sale on Schedule D. If you sold at a loss, you can use that loss to offset other capital gains, or up to $3,000 of ordinary income in a single year. Losses beyond that carry forward to future years.

How to organize your money market fund tax information

Keep your 1099-DIV forms from the fund company in a file with your tax documents. If you sold shares during the year, keep the confirmation statements showing the sale price and date. If you bought shares at different times, keep the purchase confirmations so you can calculate your cost basis accurately.

If you own money market funds in multiple accounts — a taxable brokerage account, a 529 college savings plan, a taxable account at a different firm — you will receive separate 1099-DIV forms from each one. Add up all the ordinary dividends from all the forms and report the total on your tax return. The same applies to capital gains: total them across all accounts.

Some brokerages and fund companies offer tax-loss harvesting tools that help you identify losses to offset gains. If you sold shares at a loss, these tools can help you find other losses to use against them, or help you plan future sales to generate losses in years when you have gains.

Frequently Asked Questions

Do I owe tax on money market fund interest if I did not withdraw it?

Yes. The IRS taxes you on the interest in the year the fund earned it, whether you took the money out or reinvested it. If you reinvested the interest, it bought more shares of the fund, and you still owe tax on the income that year.

What is the difference between a 1099-DIV and a 1099-INT?

A 1099-DIV reports distributions from funds and stocks. A 1099-INT reports interest from savings accounts, CDs, and bonds you own directly. Money market funds use 1099-DIV. Both types of income are taxed as ordinary income, so the form does not change your tax rate.

Can I deduct losses from money market funds?

Yes, if you sold shares at a loss. Report the loss on Schedule D. You can use it to offset capital gains from other investments, or up to $3,000 of ordinary income per year. Unused losses carry forward to future years.

Are money market funds in a 401(k) taxed every year?

No. Money inside a 401(k) or traditional IRA grows tax-deferred. You do not receive a 1099-DIV and you do not pay tax on the interest until you withdraw money from the account. In a Roth IRA, the interest is never taxed.

What if my money market fund shows a capital gain on the 1099-DIV?

Report it on Schedule D. If it is a short-term gain (the fund held the security one year or less), it is taxed as ordinary income. If it is long-term, it may be taxed at a lower rate. Most money market funds show only interest income, not capital gains, because they hold very short-term securities.