Short Selling

The essence of trading is buying and selling financial products for income. If you think the asset will rise in value, buy first and sell afterward — this is known as a “long position.” If you want to speculate on declining value, borrow the security to sell it first and then buy it later to close the short position — this is “selling short.” (There are other ways to speculate on market drops, like buying put options or inverse ETFs, both of which are long positions.)

There are two types of short sales: (1) a short sale and (2) a short sale against the box. Both involve borrowing securities from another account holder arranged by a broker.

STOCK BORROW FEES AND LOAN PREMIUMS

Short selling is not free; a trader needs a broker to arrange a stock loan. Brokers charge short sellers “stock borrow fees” or “loan premiums.” Tax research indicates these payments are “fees for the temporary use of property.” Watch out: Many brokers refer to stock borrow fees as “interest expense,” which confuses short sellers and their accountants.

Stock borrow fees are business expenses when the taxpayer has TTS. 

There are many unique tax rules for short sellers, including constructive sales on appreciated positions, dividends and payments in lieu of dividends, dividend issues for the short seller, dividend issues for the lender, and traders versus investors.

Excerpt from Green’s Trader Tax Guide Chapter 16 Short Selling. 

  • Capital Loss Carryovers
  • Securities
  • Section 1256 Contracts
  • Options
  • Exchange-Traded Funds (ETFs)
  • Forex
  • Cryptocurrencies
  • Other Financial Products
  • Short Selling
  • Capital Loss Carryovers
  • Securities
  • Section 1256 Contracts
  • Options
  • Exchange-Traded Funds (ETFs)
  • Forex
  • Cryptocurrencies
  • Other Financial Products
  • Short Selling
    • Accounting Services When it comes to accounting, securities and cryptocurrency traders face several challenges. Incorrect accounting can throw off your entire tax return, so it's imperative to have your ducks in a row.
    How To Avoid Taxes On Wash Sale Losses More on How To Avoid Taxes On Wash Sale LossesBy: Robert GreenOn: 08/05/19
    Investment Fees Are Not Deductible But Borrow Fees Are More on Investment Fees Are Not Deductible But Borrow Fees AreBy: Robert GreenOn: 07/12/18
    Jul 19, 2018 - Investment Fees Are Not Deductible But Borrow Fees Are (Interactive Brokers) More on Investment Fees Are Not Deductible But Borrow Fees Are (Interactive Brokers)
    Sep 28, 2016 - Short Sellers Should Not Rely On Brokers For IRS Reporting (Recording) More on Short Sellers Should Not Rely On Brokers For IRS Reporting (Recording)
    Testimonials
    I am a stock and options trader and have been for a number of years. I also have used your Tradelog software for most of that time. I have to tell you, that without Tradelog, I would not have been able to file my Tax Returns. I received a 1099-B from Tradestation on March 13. I had already downloaded and run my Tradelog reports. I am a MTM Trader In Securities. Yet, there were more than $2 million in errors on my Tradestation 1099 report. I have called them every month since then, and each month they tell me that I am one of the clients to receive a corrected 1099-B and that it will be coming "soon." Yet, here it is, August 16 and still no corrected 1099-B. I seriously question whether next year's 1099-B will be accurate either. I used my Tradelog numbers to file my Tax Return, and explained the situation to the IRS in notes. Without Tradelog I would have been lost. Thank you for Tradelog. And, by the way. there should be a huge penalty for Tradestation for not providing me an accurate 1099-B, don't you think?