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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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