Speculation on Reg D covering has raised another question as to why they would (or wouldn't) have to cover - and when ..
For any tax guru out there ..
Under the 1997 Tax law, (unlike prior years) when one shorts against the box, the deferral on the gain must be realized, at the time of the short. In our case, if the Reg D short, there is a taxable event at the time of the short. Now here's the mysterious part.
If they, for example, short at $3. per share (against future converted stock), and the stock (even with their favorable conversion formula) spikes up to a conversion price of $5. IS THERE A TAXABLE EVENT WHEN THEY NOW USE THE $5 stock to cover the $3. short in the amount of $2? (The diff between 5 and 3) OR, is the taxable event overwith at the time they short, in that the increase or gain in value of the "covering" share used is not "income" for which taxes must be paid?
My thought is that if the only taxable event is at the time of the short, then there is no tax reason to cover. If they would have to pay tax on appreciated "covering" stock, it seems to me that they would want to cover since it would be a taxable event, yet, because of the short position which is required to be covered, would not receive actual benefit from the increase. I do recognize also that the short and long position negate each other, regardless of the move, but also, do any wash sale rules apply ?
Anyone with any knowledge on the ramifications regarding taxability of appreciated (beyond the short price) "covering" shares ??
Sorry for the heavy questions on such a Blessed day, but it was one of those that just kind of stayed with me .... |
