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I just covered a short position of FAZ I held for over one year and was told by Fidelity it is treated as a short term gain according to IRS rule 550. Does anyone know how short positions can be treated as long term capital gains?

Sorry - even though Fidelity probably isn't supposed to give tax advice, they are correct in this case. Generally, short sales can't be long term, because you generally hold the stock itself for less than a year and a day before you deliver it to close the sale, since you borrowed the stocks that you originally sold. From pg 58 of IRS Pub 550

ShortTerm or LongTermCapital Gain or Loss

As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you ac-tually hold the property eventually delivered to the lender to close the short sale.

Example. Even though you do not own any stock of Ace Corporation, you contract to sell 100 shares of it, which you borrow from your broker. After 13 months, when the price of the stock has risen, you buy 100 shares of Ace Cor-poration stock and immediately deliver them to your broker to close out the short sale. Your loss is a short-term capital loss because your holding period for the delivered property is less than 1 day.

There are more rules around short straddles, etc. where you own shares long at the same time you sell shares short, and you can read about those in the link, in case one of those exceptions applies to your situation. But for a 'run of the mill' short sale, where you sell shares you don't own, and buy to cover the short on or shortly before the day that you close the short sale out, you don't hold the stock itself for the time required to record a long-term capital gain on the sale.

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