Is frsxx federal tax exempt?
Executive summary
FRSXX is not federally tax-exempt: dividends from Treasury- or government‑backed money‑market funds are generally subject to federal income tax [1][2]. Where such funds can help is at the state and local level—a portion of dividends derived from U.S. government obligations may be exempt from state income tax, but that exemption depends on the fund’s exact holdings and the investor’s state [3][2].
1. What the question means: “Is FRSXX federal tax exempt?” — parsing the claim
Asking whether FRSXX is “federal tax exempt” is specifically about whether dividends or interest paid by the fund are free from federal income tax; that is distinct from state or local tax treatment, which can differ based on the source of the fund’s income [1][2].
2. The clear headline: dividends are taxable at the federal level
Reliable fund documents and tax guidance make the same point: money‑market and government cash reserve funds are subject to federal income tax, and dividends paid out are reportable as ordinary income for federal purposes [2][1].
3. The nuance many investors care about — state tax treatment
A separate tax rule can make a portion of a Treasury‑focused fund’s dividends exempt from state and local income taxes if that income was derived from U.S. government obligations; the exempt share varies year to year and by fund [3][4]; Fidelity and tax‑reporting sites publish percentages investors must use to calculate state‑exempt portions [5][6].
4. Why the exempt percentage matters in practice
Only the fraction of a fund’s dividends attributable to U.S. government securities is potentially state‑tax exempt, so investors who assume an entire fund is tax‑free at the state level can overpay state tax unless they apply the published exempt percentage or follow fund tax guides [3][4]; Form 1099‑DIV typically reports total ordinary dividends but not the exempt fraction, so investors must consult fund tax information [4][6].
5. What the reporting says specifically about FRSXX (and the limits of that evidence)
Publicly available commentary indicates some participants on forums believe FRSXX is Treasury‑based (and therefore may generate state‑exempt income) but the explicit, authoritative fund tax disclosures for FRSXX were not among the supplied documents; one Bogleheads post expresses the belief that “FRSXX is Treasuries” [7], which signals a plausible pattern but does not replace official prospectus or Fidelity tax pages for definitive federal/state status [2][6].
6. Bottom line and practical next steps for investors
Treat FRSXX dividends as federally taxable income unless an official fund prospectus or Fidelity tax document explicitly says otherwise [2][6]; for state tax treatment, obtain the fund’s annual “percentage of income from U.S. government securities” or Fidelity’s state‑tax exemption table and apply that fraction to your dividends when filing state returns [3][5]. If official fund tax information for FRSXX is unavailable in current materials, request the fund’s prospectus or the Fidelity tax‑information page before claiming exemptions [6][2].