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<You've added a small twist in that we now know that the short position was covered before the end of the tax year. I'm more confident that the exception in IRC Sec. 1259 would apply to these facts. Once again, specific identification is not the issue, the constructive sale of a long position is the issue.>

Thanks for the reply! However, in my hypothetical scenario, it makes a big difference whether the Schwab or Waterhouse shares were considered to be the ones involved in the "constructive sale." I.e., if they are the Schwab ones, I pay a huge long-term capital gains tax. If they are the Waterhouse ones, then I pay a small short-term capital gains tax. And even if I qualify for the exception in IRC Sec. 1259, again it matters a great deal which shares were involved in that transaction. If they are the Schwab ones, then my holding period starts afresh on the day of the short sale - making them short-term holdings even though I've held them for several years. If they are the Waterhouse ones, then I can still retain my long-term holding period on my original YHOO shares. Therefore, being able to "identify" which shares were involved in this transaction makes a big difference.

Thanks again for reading this,
Carl Erikson
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