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Author: sol65 One star, 50 posts Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121599  
Subject: Thorny Tax Questions (cross post per Phil Marti) Date: 5/25/2012 4:51 PM
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I have a few thorny tax questions for which I cannot seem to find a clear answer. I've searched (and posted) in Fool forums, searched the IRS and everywhere else. I could ask my CPA but frankly lack confidence that they have access to a truly authoritative answer. I also think that the CPA cost to answer the question will likely exceed the tax benefit I'll gain by being able to claim these costs. So I'm wondering if Motley Fool itself may have already obtained answers since the Fool does all of the same things that I do. Or perhaps the Fool is willing to obtain answers that will benefit many Fools.

1. Payment in Lieu of Dividends ("PIL")that we as short sellers must pay if we hold a short position in a stock on the record date: I am well aware from clear IRS publications that if the short position is kept open for at least 46 days then I am permitted to deduct PIL as investment interest expense. If the short position is kept open for 45 days or fewer than I can only add the PIL to my basis - cannot deduct it as interest expense. The foregoing is all very clear. The question here is for the position kept for at least 46 days do I have the choice between add to basis or deduct it as investment interest expense - or is deduct it as investment interest expense the only option? I clearly understand that there is no choice for 45 days or fewer; just want to know if there is a choice if it's at least 46 days.

2. "Hard to borrow" fees paid on shorting stock: Is there a way to claim this on taxes? There is no clear IRS directive on this. A "no deduction" wording is included as part of the rules that you cannot deduct expenses related to tax exempt securities, but I don't know if this only relates to shorting tax exempt securities or all shorting. Real life reference is the VXX naked short informally recommended by Jeff Fischer of Motley Fool Pro. Pro wrote naked calls and was driven into (and closed) the short but many members and Jeff personally maintained a short in VXX itself. Pro is also short SPY.

3. Finally, interest expense on a short foreign currency position. This is also driven by Pro which has shorted FXE (an ETF that holds the Euro). I found it easier, cheaper and more efficient to sell the Euro itself for US dollars (EUR.USD forex pair). So I pay interest on my Euro short position and wonder if and how that can be claimed on taxes.

I've read and re-read the relevant sections of Pub 550 to no further avail.

I look forward to enlightenment on these issues for which I need guidance.

I understand that answers provided may not be authoritative and will not hold anyone responsible if they turn out to be incorrect. But if you answer please tell me the source of your answer.
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Author: loopholes One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116187 of 121599
Subject: Re: Thorny Tax Questions (cross post per Phil Ma Date: 5/25/2012 11:28 PM
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I'll give question 1 a shot.

The internal revenue code (Section 263(h)) denies the right to deduct these payments if you have not held the stock for more than 45 days; stated another way, it allows you -- but does not require you --to deduct these payments if the short position is open on day 46.

The bad news, however, is that the same provision of the code only permits you to increase your tax basis in the stock purchased to close the short by "the amount not allowed as a deduction under the preceding sentence." The preceding sentence states the 45 day rule.

So, as I read it, you can choose not to take a deduction you're entitled to, but you can't choose to capitalize the foregone deduction as basis in the replacement shares. Reasonable minds may differ.

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