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Author: CarlErikson Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: Constructive sale confusion Date: 11/9/1999 2:41 PM
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The following excerpt comes from part 3 of the Constructive Sales articles on the Tax Q&A:

<Example #1: On May 1, 1999, you bought 100 shares of ABC Corporation stock for $1,000. On September 3, 1999, you sold short 100 shares of ABC stock for $1,600. You held both of these positions until January 10, 2000. On that date, you close your offsetting short position for $1,800 and you keep your "long" position open until at least March 11th (at least 60 days). And, during that time, you did not enter into any other offsetting positions that would have reduced your risk of loss on your original position. Since you have met all of the exceptions to the constructive sale rules, you have no constructive sale for 1999. When you close your short position on January 10th, you'll recognize a short-term capital loss of $200 in tax year 2000. Your cost basis for your long position will remain $1,000, but your holding period will move to January 10, 2000.>

I just read the applicable parts of Publication 550 on Constructive Sales and it seems to imply that yes, if there is a constructive sale, that it gives you a new holding period for the position that begins on the date of the constructive sale. However, in the example above, you are exempt from the constructive sale and therefore your holding period for the original position should remain intact - not pushed forward to the date of the short sale. This discrepancy between this Tax Q&A article and Publication 550 has caused me some confusion (look at my three or four previous posts). Which scenario is correct?

Furthermore, by looking at Publication 550 I may have answered another confusing aspect of these tax laws. In Publication 550, under "Sale of appreciated financial position," it claims:

"A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, as the same time, you constructively sold the other appreciated financial position."

This implies to me that my hypothetical scenario in my "One more try" post is actually not a problem. I hold an appreciated position of 1,000 shares of YHOO at Schwab. I take on another long 1,000 shares at Waterhouse - then I short 1,000 shares on Datek. The appreciated financial position on this transaction refers to the 1,000 Waterhouse shares. I close both sides of the transaction simultaneously. I have a constructive sale on these 1,000 shares, but it is a short-term trade anyway. The original 1,000 shares at Schwab are not affected since I "continue to hold the original position."

Thanks for listening!
Carl Erikson
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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 20814 of 121095
Subject: Re: Constructive sale confusion Date: 11/9/1999 8:56 PM
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<<The following excerpt comes from part 3 of the Constructive Sales articles on the Tax Q&A:>>

Great...you finally found my musings regarding the constructive sale rules. I'm happy for you.

<Example #1: On May 1, 1999, you bought 100 shares of ABC Corporation stock for $1,000. On September 3, 1999, you sold short 100 shares of ABC stock for $1,600. You held both of these positions until January 10, 2000. On that date, you close your offsetting short position for $1,800 and you keep your "long" position open until at least March 11th (at least 60 days). And, during that time, you did not enter into any other offsetting positions that would have reduced your risk of loss on your original position. Since you have met all of the exceptions to the constructive sale rules, you have no constructive sale for 1999. When you close your short position on January 10th, you'll recognize a short-term capital loss of $200 in tax year 2000. Your cost basis for your long position will remain $1,000, but your holding period will move to January 10, 2000.>

Yup...looks like my fingerprints on that paragraph.

<<I just read the applicable parts of Publication 550 on Constructive Sales and it seems to imply that yes, if there is a constructive sale, that it gives you a new holding period for the position that begins on the date of the constructive sale.>>

OK...

<< However, in the example above, you are exempt from the constructive sale and therefore your holding period for the original position should remain intact - not pushed forward to the date of the short sale. This discrepancy between this Tax Q&A article and Publication 550 has caused me some confusion (look at my three or four previous posts). Which scenario is correct?>>

Obviously, I believe that my position is correct. It has been a long standing rule that when you "neutralize" your long position with an offsetting short position, you also lose the benefit of the time that you were in "neutral". If that were not the case, you could hold a stock for 11 months, then short it to hedge your position for another month, and get long term gain treatment on the gain, and short term loss treatment on the loss (assuming that the shares appreciated in value). This is the classic way that we would ALL like to have things...gains long and losses short. So the rules (as noted in Pub 550 dealing with offsetting positions...look in the wash sale section of the pub...not the constructive sale section) don't allow for such a transaction...at least in my opinion.

<<Furthermore, by looking at Publication 550 I may have answered another confusing aspect of these tax laws. In Publication 550, under "Sale of appreciated financial position," it claims:

"A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, as the same time, you constructively sold the other appreciated financial position.">>

If you can really understand this paragraph without going to the regulations for clarification, then you are truely my hero.

<<This implies to me that my hypothetical scenario in my "One more try" post is actually not a problem. I hold an appreciated position of 1,000 shares of YHOO at Schwab. I take on another long 1,000 shares at Waterhouse - then I short 1,000 shares on Datek. The appreciated financial position on this transaction refers to the 1,000 Waterhouse shares. I close both sides of the transaction simultaneously. I have a constructive sale on these 1,000 shares, but it is a short-term trade anyway. The original 1,000 shares at Schwab are not affected since I "continue to hold the original position.">>

I would disagree. This would be tantamount to "doubling up" when dealing with the short sale rules...which also isn't allowed. Again, if you are really interested in these provisions, you'll have to go to the regulations. Pub 550 doesn't really help...because the rules are so complicated and the code is so vague on many of the issues involved.

Sorry if this just further confuses the issues...but it's the best I got.

TMF Taxes
Roy


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