Sold Short Position and Taxes

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LoveTheBogle
Posts: 93
Joined: Tue Aug 13, 2019 5:53 pm

Sold Short Position and Taxes

Post by LoveTheBogle »

I know for a buy long position that if the position is held for 12 months or longer then it is taxed as long term capital gain and if held less than 12 months is short term capital gains.

What about sold short position?
I vaguely recall reading something many years ago that it doesn't work the same way as buy long position because the time period is based upon the acquisition date which is technically the close date when you cover the short position (ie: all short positions are held for 1 day even if you held the position for years). I don't know, this is what I vaguely recall.

If someone held a sold short position in a stock for over 12 months is it still considered short term capital gains?

Secondly, how would one report this on 1040 Form 8949 where it asks for "Date Acquired" and "Date Sold or Disposed of"?

Let's give two hypothetical 100 share closed positions as an example for discussion where the examples are the same except for opening of the sold short position date. How would this be reported on Form 8949?

Example 1
Sold Short: 1/25/2021
Covered (closed) Short: 9/10/2021
Sold Short Price: 50.00
Covered Price: 40.00
Profit: 10.00 per share ($1,000)

Example 2
Sold Short: 1/25/2015
Covered (closed) Short: 9/10/2021
Sold Short Price: 50.00
Covered Price: 40.00
Profit: 10.00 per share ($1,000)
dallasjava
Posts: 62
Joined: Mon Nov 12, 2018 4:50 pm

Re: Sold Short Position and Taxes

Post by dallasjava »

I would suggest you read: https://www.irs.gov/publications/p550. Short sales look to be a lot more complex than a normal buy & sale.
Topic Author
LoveTheBogle
Posts: 93
Joined: Tue Aug 13, 2019 5:53 pm

Re: Sold Short Position and Taxes

Post by LoveTheBogle »

Anyone with experience and knowledge on this?

dallasjava - Quick review of pub 550 seems nuance. Says that holding period is less than 1 day when there is a 13 month time period from borrowering (shorting how I read it) and closing (covering). Why then is there "long-term capital gain" in this section title? Why not a simple "all short sales are short term capital gains regardless of holding period." period. no interpretation?

See below from IRS PUB 550
IRS PUB 550 under "Short-Term or Long-Term Capital Gain or Loss"

As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale.

Example.
Even though you do not own any stock of Ace Corporation, you contract to sell 100 shares of it, which you borrow from your broker. After 13 months, when the price of the stock has risen, you buy 100 shares of Ace Corporation stock and immediately deliver them to your broker to close out the short sale. Your loss is a short-term capital loss because your holding period for the delivered property is less than 1 day.

Special rules.
Special rules may apply to gains and losses from short sales of stocks, securities, and commodity and securities futures (other than certain straddles) if you held or acquired property substantially identical to property that sold short. But if the amount of property you sold short is more than the amount of that substantially identical property, the special rules do not apply to the gain or loss on the excess.

Gains and holding period.
If you held the substantially identical property for 1 year or less on the date of the short sale, or if you acquired the substantially identical property after the short sale and by the date of closing the short sale, then:

Rule 1. Your gain, if any, when you close the short sale is a short-term capital gain; and

Rule 2. The holding period of the substantially identical property begins on the date of the closing of the short sale or on the date of the sale of this property, whichever comes first.

Losses.
If, on the date of the short sale, you held substantially identical property for more than 1 year, any loss you realize on the short sale is a long-term capital loss, even if you held the property used to close the sale for 1 year or less. Certain losses on short sales of stock or securities are also subject to wash sale treatment. For information, see Wash Sales , later.

Mixed straddles.
Under certain elections, you can avoid the treatment of loss from a short sale as long term under the special rule. These elections are for positions that are part of a mixed straddle. See Other elections , later, for more information about these elections.
dallasjava
Posts: 62
Joined: Mon Nov 12, 2018 4:50 pm

Re: Sold Short Position and Taxes

Post by dallasjava »

Yes they are nuanced. I would imagine most short sales are short-term capital gains, but I would recommend you speak to a tax professional.
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theRoCK
Posts: 80
Joined: Wed Jul 29, 2020 5:40 pm

Re: Sold Short Position and Taxes

Post by theRoCK »

LoveTheBogle wrote: Mon Sep 13, 2021 11:46 am Anyone with experience and knowledge on this?

dallasjava - Quick review of pub 550 seems nuance. Says that holding period is less than 1 day when there is a 13 month time period from borrowering (shorting how I read it) and closing (covering). Why then is there "long-term capital gain" in this section title? Why not a simple "all short sales are short term capital gains regardless of holding period." period. no interpretation?

See below from IRS PUB 550

<trimmed>
If you dont hold the same/subtantially identical stock while also holding the short position, its straightforward, gains are always short, losses are short or long depending on how long you held the short position.
The interpretation comes when you hold the substantially identical security alongside the short position. Any gain that you make is always going to be short term capital gains but could reset the holding period of the non-short stock holding. Losses could be short term or long term based on your holding period for both the short and the non-short position.
learntoinvest123
Posts: 77
Joined: Sat Aug 29, 2020 9:20 am

Re: Sold Short Position and Taxes

Post by learntoinvest123 »

AFAIK, short sales gains are always short term since it reverses the buy and sell. Date acquired becomes the day you covered the short and date sold becomes the day you sold short. Something like a negative holding period so gains are always short term.
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