J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

30.5 Short Sales of Stock

A short sale is a sale of stock borrowed from a broker. The short sale is closed when you replace the borrowed stock by buying substantially identical stock and delivering it to the broker or by delivering stock that you held at the time of the short sale. One objective of a short sale is to profit from an anticipated drop in the market price of the stock; another objective may be to use the short sale as a hedge.

Tax rules applied to short sales are designed to prevent you from:

• Postponing gain to a later year when you sell short while holding an appreciated position in the same or substantially identical stock. This type of short sale is called “a sale against the box.”
• Converting short-term gains to long-term gains.
• Converting long-term losses to short-term losses.

Year in which gain on short sale is realized.

Generally, you report gain on a short sale in the year in which you close the short sale by delivering replacement stock. However, if you execute a short sale while holding an appreciated position in the same stock (short sale against the box) or substantially identical stock is acquired to close an appreciated short position, the short sale or acquisition of substantially identical stock is treated as a constructive sale of an appreciated financial position (30.8) and you must report the transaction in the year of the constructive sale, even though delivery of replacement stock is made in a later year; see Examples 2 and 3 below. There is this ...