Subject: Tax Code - Short Sales Treatment

Last-Revised: 13 Aug 1999
Contributed-By: Art Kamlet (artkamlet at aol.com), Chris Lott (contact me)

Gains from a short-sale stock transaction are considered short-term capital gains regardless of how long the position is held open. This actually makes a kind of sense, since the only time you actually held the stock was between when you bought the stock to cover the position and when you actually delivered that stock to actually close the position out. This length of time is somewhere from minutes to a few days. (Please see articles elsewhere in this FAQ explaining short sales, as well as long- and short-term capital gains.)

What do you do if a short sale is open at the end of a calendar year? Brokerage houses report all sales (normal or short) on Form 1099-B as "sales", so you might think that you have to report it on your Schedule D to make the total sales number equal that reported to the IRS. But since the position is still open, the sale was not a taxable event. You sure don't want to pay tax on the amount of money you received when you went short!

Here's one way to proceed. You can attach a statement along the following lines to your Schedule D:

Attachment to 1998 Form 1040 Schedule D (Names & Social security #)

Explanation of the difference between Forms 1099-B and Schedule D Sales totals:

Forms 1099-B include $XXXX of short sales which were opened in 1998 and remained open on 31 December 1998.

Forms 1099-B Totals:          $YYYY
less short positions
opened during 1998
remnaining open 12/31/98    ( $XXXX  )
                             _______
Adjustment (if any)           $WWWW
                            ________
Schedule D Sales Totals       $ZZZZ