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Financial Planning / Tax Strategies
|Subject: Re: shorting a long position||Date: 12/29/1998 9:03 PM|
|Author: TMFTaxes||Number: 7746 of 120432|
[[ Hi All,]]
If I currently own a stock long, can I sell short the same number of shares and
neutralize my position? For example, if I own 200 shares or AOL, can I short
the 200 shares at the same time?]]
Sure. But you may learn much more first hand about the new laws regarding constrictive sales of appreciated financial position. In effect, the law says that if you "short against the box" (which is what you are really talking about), Uncle Sammy will treat this "neutral" position as if you SOLD the sares.
Pursuant to changes made by the Taxpayer's Relief Act of 1997, taxpayers must recognize gain (but not loss) upon a constructive sale of any appreciated financial position in stock, a partnership interest or certain debt instruments. A constructive sale occurs when the taxpayer enters into one of the following transactions with respect to the same or substantially identical property:
• a short sale,
• an offsetting notional principal contract, or
• a futures or forward contact.
For a taxpayer who has one of these transactions, a constructive sale occurs when it acquires the related long position. Other transactions will be treated as constructive sales to the extent provided in Treasury regulations.
The constructive sale rules are generally effective for transactions entered into after June 8, 1997. And there IS an exception to the constructive receipt rules.
In applying these rules, any transaction which would otherwise be treated as a constructive sale during the taxable year is disregarded if:
• the transaction is closed before the end of the 30th day after the close of the taxable year,
• the taxpayer holds the appreciated financial position throughout the 60-day period beginning on the date such transaction is closed, and
• at no time during such 60-day period is the taxpayer's risk of loss with respect to such position reduced by reason of a circumstance relating to a diminished risk of loss if references to stock included references to such position.
If a transaction that is closed is reestablished in a substantially similar position, the exception applies provided that the reestablished position is closed prior to the end of the 30th day after the close of the taxable year and if, for the 60 days after closing a transaction, the taxpayer hold the appreciated financial position and at no time is the taxpayer's risk of loss reduced by holding certain other positions.
[[ More specifically since this question is really tax related: Is this a way of not
selling my original shares (therebye keeping them past the year end or 1 year tax
cut) and getting around Uncle Sam? Or will the short sale be treated as a sell of
my original shares?]]
It used to be a popular hedging technique. But with the imposition of the new laws, this "short against the box" technique is far less popular. You simply wanted to HEDGE your position...but not sell it.
The good news is that if you wait a few more days, you CAN short/box your position and not have to deal with the tax issues until around this time next year. But this short/box technique will NOT turn a short term gain into a long term gain. Basically, the holding period is suspended (and perhaps even eliminated) during the time that your hedge position is open.
Hope this helps...
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