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.

Although it’s uncertain in the tax code, there might be a rationale for investors to deduct stock borrow fees as “other itemized deductions” on line 16 of Schedule A (itemized deductions). The code seems to include it, but Schedule A instructions do not. Consult a tax professional.

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

Stock borrow fees are not interest expenses, so investors can’t include them in those deductions.

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