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I own 100 shares of XYZ that I bought at 100. I went short 100 shares against the box at 90. The stock is now at 95. When using my original shares to cover the short how are tax implications computed?

a) My assumption is that I subtract the short sale price of 90 from the original basis of 100 for a 10 point loss.

b)Does the current market price of XYZ (i.e. 95)at the time of covering figure in this any way?

Thanks,
KLib@juno.com
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I own 100 shares of XYZ that I bought at 100. I went short 100 shares against the box at 90.

You've almost certainly got a constructive sale at this point.

The stock is now at 95. When using my original shares to cover the short how are tax implications computed?

a) My assumption is that I subtract the short sale price of 90 from the original basis of 100 for a 10 point loss.


Yep.

b)Does the current market price of XYZ (i.e. 95)at the time of covering figure in this any way?

Nope.

I think there's an article on constructive sales in the FAQ. The link is at the top of this page. You might want to read it to get a handle on constructive sale issues.

--Peter
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Peter,

I think you are wrong about having a constructive sale. Since his long position was established at 100 and his short sale was at 90, I believe it is safe to assume the fair market value of the stock at the time of the sale was 90. There would not be an unrecognized gain and consequently no constructive sale.

Good Luck,
Z
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<<I own 100 shares of XYZ that I bought at 100. I went short 100 shares against the box at 90. The stock is now at 95. When using my original shares to cover the short how are tax implications computed?>>

At first blush, you WOULD think there is a constructive sale going on here. But, as was pointed out, in order to have a constructive sale, you must first have an "appreciated" position. Since your long position was not appreciated prior to going short against the box, I would agree that there are no constructive sale implications here. What you've basically done is lock in a loss on your original position. There is no way that you can ever make any money on this "hedged" position. And since the position is "hedged" without any underlying capital gain issues, Uncle Sammy doesn't really care how long you keep the position open. So, for tax purposes, you've got a long position with a corresponding short against the box. I don't know why you would want such a position, but to each his (or her) own.

<<a) My assumption is that I subtract the short sale price of 90 from the original basis of 100 for a 10 point loss.>>

Nope. Each transaction stands alone. If you sell out your short position at $95, you have a $5/share loss on the short position. If you sell out the long position, you have a $5/share loss on the long position. It's a loser either way. The only way that you'll recognize your FULL $10/share loss is to sell off BOTH positions. Again, you're locked into a position that you don't really want any part of...and I can't think of any reason why you're there. It can NEVER make you any money. Cover the short, sell off the long and take your losses. Then be careful of the wash sale rules if you want to get back into the stock.

<<b)Does the current market price of XYZ (i.e. 95)at the time of covering figure in this any way?>>

Sorry, but I'm not quite sure what you are asking here. In your situation, no matter WHAT the price of the stock is now or in the future, you'll ALWAYS have a $10/share loss once you finally wind down both ends of the transaction. This will be true regardless of if the stock price is $5/share when you cover and sell or $195/share.

I hope that this responds to your question.

TMF Taxes
Roy

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But, as was pointed out, in order to have a constructive sale, you must first have an "appreciated" position.

Thanks for the gentle correction.

--Peter <== Hmmm - constructive sales apply to gains, wash sales apply to losses. I think I've got it.
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