7523. What is a “short sale”? What is meant by the expression “short against the box”?Nuco Employeercline202014-06-26T16:56:00Z2014-06-26T16:56:00Z35903368Case Western Reserve University287395114Site Map/Investments/Stocks/Sale or Exchange/Short SalesTaxFactsDefaultArticle2006-01-04T00:00:00Z120521021-00-tf2.xml1021.00;#1971;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2What is a “short sale”? What is meant by the expression “short against the box”?
53400.0000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T23:11:56Z7523. What is a “short sale”? What is meant by the expression “short against the box”?In a “short sale” an individual contracts to sell stock (or other securities) that the individual “does not own or the certificates for which are not within his [or her] control so as to be available for delivery when, under the rules of the Exchange, delivery must be made.”Provost v. U.S., 269 U.S. 443, 450 (1926). Thus, in a short sale, the seller usually borrows the stock (or security) for delivery to the buyer. (The seller must generally pay a premium for the privilege of borrowing such stock and will usually be required to reimburse the lender for any dividends paid during the loan period.) At a later date, the short seller will repay the borrowed stock to the lender with shares the seller held (but that were not available) at the time of the short sale or with shares purchased in the market, whichever he or she chooses.See also Rev. Rul. 72-478, 1972-2 CB 487.The act of delivering stock (or securities) to the lender in repayment for the borrowed shares is referred to as “closing” the short sale. The date the sales agreement is made is considered to be the “date of the short sale.”In a sale “short against the box” the short seller already owns (on the date of the short sale) shares of stock (or securities) that are identical to those sold short, but chooses to borrow the necessary shares rather than deliver the shares owned.A contract to sell stock or securities on a “when issued” basis is considered a short sale; the performance of the contract is considered to be the “closing” of that short sale.See S. Rep. No. 2375 (Rev. Act of 1950), 1950-2 CB 545; Treas. Reg. §1.1233-1(c)(6), Ex. (6).A transaction in which a taxpayer purchases convertible bonds and as nearly simultaneously as possible sells the stock into which the bonds are convertible at a price relatively higher than the price of the bonds, then converts the bonds and uses the stock received to close the stock sale, is a short sale.Rev. Rul. 53- 154, 1953-2 CB 173. (Such a transaction is also an arbitrage operation, see Q 7530.) See Q 7524 regarding the tax treatment of short sales.The purchase of a put option (see Q 7554, Q 7556) is treated as a short sale for some purposes.See, e.g., IRC Sec. 1233(b). It is unclear whether such treatment will be applied for purposes of the constructive sales rules of IRC Section 1259. See Q 7605 to Q 7607.In applying the short sale rules, a securities futures contract (see Q 7579) to acquire property will be treated in a manner similar to the property itself.H.R. Conf. Rep. No. 106-1033 (CRTRA 2000). See IRC Sec. 1233(e)(2)(D). Thus, for example, the holding of a securities futures contract to acquire property and the short sale of property that is substantially identical to the property under the contract will result in the application of the rules under IRC Section 1233(b) (regarding short-term gains and holding periods). (Because securities futures contracts are not treated as commodity futures contracts under IRC Section 1234B(d), the rule providing that commodity futures are not substantially identical if they call for delivery in different months does not apply.) In addition, a securities futures contract to sell is treated as a short sale of the property.IRC Sec. 1233(e)(2)(E); H.R. Conf. Rep. No. 106-1033 (CRTRA 2000). See IRC Sec. 1234B(b).The SEC has made permanent a rule that seeks to reduce the potential for abusive “naked” short selling in the securities market. Rule 204 requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. The rule became effective July 31, 2009.Rule 204 of Regulation SHO (17 CFR 242.204); Release No. 34-60388, 74 Fed. Reg. 38266 (7-31-2009), SEC Press Release 2009-172 (7-27-2009).