TransWikia.com

Can capital gains from shorting a stock ever be taxed as "long term?"

Personal Finance & Money Asked by Ian Fellows on April 28, 2021

Is there ever a situation where the capital appreciation from shorting a stock would be considered long term?

My understanding is that the “holding period” for the stock is the length of time the stock bought to close out the short sale is held. Since the close out usually happens immediately, this implies that any gain is taxed as a short term gain.

I am wondering if there are any exceptions to this. For example, what if the stock is shorted for some period of time, and later shares are bought long and held for > 1 year. After that year, the short is closed out using the bought shares. Would this be considered a long term capital gain, or would it be considered “constructive?”

2 Answers

Short answer: yes.

Your last paragraph makes me unsure whether or not you know how shorting works, though.

Generally you open a position by buying a stock and you pay long term capital gains tax if you hold that stock (or have an open position) for over a year.
If you short a stock you're selling a stock you don't own (to open a position) and then later you buy the stock to close the position. It's possible to have an open short position for a significant amount of time.

You close the short position by buying the stock. If you buy more stock than you shorted you are opening a long position (unrelated to your short position), which you need to then hold for over a year to pay long term capital gains tax.
Do note that this isn't a common thing because you're likely paying 8% or so in interest on a short position. So it's likely better to not have a short position for more than a year.

Answered by xyious on April 28, 2021

If you sell short without owning substantially identical property (stock or option) in your account, the holding period starts when you later buy the position to close the short sale. The holding period is one day, so it’s a short-term capital gain or loss. Most investors think selling short is the reverse of going long and the holding period should start on the date you short the security — but that is not the case.

Answered by Bob Baerker on April 28, 2021

Add your own answers!

Ask a Question

Get help from others!

© 2024 TransWikia.com. All rights reserved. Sites we Love: PCI Database, UKBizDB, Menu Kuliner, Sharing RPP