"Illegal" shorting: can someone provide a reference describing what exactly this is /how it works / the mechanism ?
From various posts I have read over time, my understanding (and questions I have) is:
1. These type of shorts are where the shares do not exist to be borrowed. ie. in a 'legal' short, a person borrows shares from somewhere and then sells them, intending to later buy them back to return to place borrowed from (but it's possible the place lending the shares may call the shares back at any time)
2. So, how are 'additional' (for lack of a better word) shares 'created' ? so that there are more shares and it is these additional shares are the ones borrowed, "shorted", and that must be returned. I presume these 'additional' shares are 'cancelled' when returned to the lender.
3. Apparently, the word 'illegal' comes from the aspect of creating the extra shares (like printing extra money and creating inflation analogy - does this analogy make sense?). Who enforces such legality? I presume this is the SEC. Being the SEC makes sense in that I have heard/read that US citizens cannot do this.
4. I have also heard of the term 'illegal shorting' in regard to / emanating from 'offshore accounts'. I have heard the SEC cannot regulate outside the USA, so does that mean that the SEC regulates the geogrphic location from which a trade is made and the SEC is limited to trades occurring from accounts domiciled in the USA? Logically, I guess this makes sense.
5. So, is it a question of citizenship or location at which the account making the trade is? Assuming the latter, then it seems it is not illegal for any account located outside the USA to make such trades. Or, is it that the SEC is not able to obtain records of trades outside the USA and therefore it is 'illegal' by the SEC doesn't know the entity doing the shorting?
Suppose this type of activity is perfectly legal. I am interested in it as I have read someone posting they had made $500,000 in 3 months! I am also interested since on some stocks that have a short position, it seems that even with a lot of trades at the ask (which one would think to be buying momentum), the stock does not move up. So, if you decide or are already long on a stock where this is occuring, it may be being shorted and that shorting may be from offshore accounts. If I think this is happening to a stock, then I would probably not want to be in a long position on it. Having said that, it could be that the price is being driven down so that shares can be accumulated for a long position at a lower price.
6. Suppose it is legal from the SEC perspective, then what about taxation? I have read that citizens of the United States must file a tax return (Form 1040?) every year, regardless of where they live, and report their world wide income. So, it seems a citizen of the United States with an offshore account should be reporting their income / capital gains and losses/ etc. from those accounts - is that correct?
If so, then it is not legal from an IRS perspective to not report that income - correct?
But, I guess the question then becomes, how does the IRS know or not know given secrecy that offshore locations say is a benefit? Maybe they they don;t know what you are doing with funds in offshore accounts, but don't they know by wire transfers, cheques, that money left the United States and conversely, that it returned to the United States?
Bottom line: is this whole thing legal, for a US citizen, from both SEC and IRS perspectives? Making $500,000 in 3 months - if you get that pace for a year that's $1.2 Million. I would gladly pay any tax on those gains.
What about non-US citizens?
I heard that a few years back that Bill Gates tried to renounce his citizenship declaring to be a citizen of some island. I did not read about it. Forget whether it is Bill Gates or not, does a US citizen need to give up their US citizenship, in order for this offshore account stuff to be legal? I have heard also, though, that giving up citizenship causes an expatriation tax to occur for persons with over $500,000 US (the number is close to that) in assets or has made over $109,000 (check for exactness on the amount) (on average or must it be in each an every year) over the past 4 years. So, it seems there is a penalty for giving up citizenship.
Supposing all of this is perfectly legal, i still don;t understand how you create additional shares, which are then shorted.
As I am not an attorney and not a tax expert (but I did talk to the IRS and discovered the expatriation tax - I wish I had the amounts they mention), can anyone shed some light? Thank you. |
