Ignorance is bliss...
I read the 1040 instructions, and thought you guys were correct. Then I read the appropriate section (pg. 50) in publication 550. Now I think I'm right.
"Special rules for gains and holding period. If you held the substantially identical property for one year or less on the date of the short sale, or if you acquire property substantially identical to the property sold short after the short sale and by the date of closing the short sale, then:
Rule 1. Your gain, if any, when you close the short sale is a short-term capital gain, and
Rule 2. The holding period of the substantially identical property begins on the date of the closing of the short sale of this property or on the date of the sale of this property, whichever comes first.
Example 1. On May 1, 1995, you bought 100 shares of Able Corp. stock for $1000. On October 2, 1995, you sold short 100 shares of similar Able stock for $1600. On May 2, 1996, you closed the short sale with the 100 shares of Able stock you bought on May 1, 1995. Because you had held substantially identical property for one year or less on the date of the short sale, the $600 gain is a short-term capital gain under Rule 1. It does not matter that the stock used to close the short sale had been held more than one year when the sale was closed.
Example 2. On May 4, 1995, you bought 100 shares of Able Corp. stock for $1000. On October 2, 1995, you sold short 100 shares of similar Able stock for $1600. On November 2, 1995, you bought 100 more shares of Able stock for $1800, which you used to close the short sasle. On this short sale you realized a $200 short-term capital loss.
On June 3, 1996, you sold for $1800 the stock you originally bought on May 4, 1995. Although you have actually held this stock for more than one year, Rule 2 applies because you sold short identical stock on October 2, 1995 (within a year of purchasing this stock). Your holding period began on November 2, 1995, the date on which the short sale closed. The $800 gain realized on the sale is a short-term capital gain."
It's amazing that people who read tax code for a living don't have a head implosion. Or perhaps they already have. |
