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Short Term vs. Long Term Treatment of Short Sales
Posted by Henry Gage on 03 April 2011 05:08 PM
Regarding: Short Term vs. Long Term Treatment of Short Sales


Questions:
This is a problem that has been occurring for two years and may be under on old issue number. Short sales that are closed after more than one year show up on short term capital gains rather than long term.

Answer:
This is by design and based on commented from tax advisers that use the product and also based on the following reading of the IRS rules.

IRS Publication 550:

"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 the 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."

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