In the world of conservative investing, the Fidelity Government Money Market Fund—known by its ticker symbol SPAXX—has become a go-to choice for those seeking safety, liquidity, and steady returns. But when tax season rolls around, many investors find themselves asking: how is SPAXX taxed, and what does “SPAXX taxation” really mean for my bottom line? In this comprehensive guide to SPAXX taxation, we’ll explore how earnings from SPAXX are classified for tax purposes, what kind of tax you’ll owe (and when), and how federal, state, and local tax rules apply to your SPAXX dividends and distributions. We’ll also cover the difference between holding SPAXX in a regular brokerage account versus a retirement account, how to report SPAXX income on your tax return, and how to make the most of your after-tax returns. Whether you’re a seasoned investor or just starting out, understanding the ins and outs of SPAXX taxation can help you avoid surprises—and maybe even save a little extra when Uncle Sam comes knocking.
What is SPAXX and Why Does Taxation Matter?
SPAXX is the Fidelity Government Money Market Fund, designed to provide investors with a stable place to park cash while earning interest. Unlike riskier investments, SPAXX maintains a steady $1 net asset value and pays out monthly dividends. But while the fund itself is low risk, the tax treatment of its earnings can be a bit more complex than your average savings account.
How Are SPAXX Earnings Taxed?
- Federal Taxes:
The income you receive from SPAXX comes in the form of dividends, which are taxed as ordinary income at your federal tax rate. This rate can range from 10% to 37%, depending on your total taxable income. Unlike some stocks or mutual funds, these are not “qualified dividends,” so you don’t get the lower capital gains tax rate. - State and Local Taxes:
Here’s where things get interesting: because SPAXX invests primarily in short-term U.S. government securities, a portion of its dividends is often exempt from state and local taxes. The exact percentage varies year to year and by state, but for 2024, about 55% of SPAXX’s income may be state tax exempt. Fidelity provides a supplemental tax letter each year so you can calculate your state tax exemption. - Capital Gains:
Since SPAXX is designed to keep its share price at $1, you’ll rarely see capital gains or losses. Almost all your taxable income from SPAXX comes from dividends, not from selling shares at a profit.
SPAXX in Tax-Advantaged Accounts
If you hold SPAXX in a retirement account like an IRA or 401(k), you don’t pay taxes on the dividends as they’re earned. Instead, you pay taxes when you withdraw funds from the account, and those withdrawals are taxed as ordinary income. This can be a smart way to defer taxes and potentially lower your tax bill in retirement.
Reporting SPAXX on Your Tax Return
At tax time, you’ll receive a Form 1099-DIV from Fidelity showing your total SPAXX dividends for the year.
- Report these dividends as ordinary income on your federal tax return (usually line 3b of Form 1040).
- For state taxes, check Fidelity’s annual supplemental letter to see what portion of your SPAXX income is exempt and adjust your state return accordingly.
SPAXX Taxation vs. Other Money Market Funds
Not all money market funds are taxed the same way. For example, municipal money market funds (like FDLXX or FTEXX) invest in municipal bonds and may offer higher levels of tax exemption, especially for those in higher tax brackets or states with high income taxes. However, these funds often have slightly lower yields than SPAXX, so it’s important to calculate your tax-equivalent yield before making a switch.
Tips to Maximize After-Tax Returns
- Compare tax-equivalent yields between SPAXX and municipal money market funds, especially if you’re in a high tax bracket.
- Use tax-advantaged accounts to defer or reduce taxes on your SPAXX earnings.
- Always check the latest state tax exemption percentages from Fidelity before filing your state return.
- Consider your overall investment strategy—sometimes a slightly higher tax bill is worth it for greater after-tax returns.
Quick FAQs: SPAXX Taxation
Q: Are SPAXX dividends tax-exempt?
A: No, SPAXX dividends are taxed as ordinary income at the federal level, but a portion may be exempt from state and local taxes depending on your state.
Q: How do I report SPAXX income on my taxes?
A: Report the total ordinary dividends from your 1099-DIV on line 3b of your Form 1040. For state taxes, use Fidelity’s supplemental letter to calculate any exemption.
Q: Is SPAXX a good choice for tax-advantaged accounts?
A: Yes! Holding SPAXX in an IRA or 401(k) allows you to defer taxes until you withdraw the funds, making it a smart option for retirement savings.