A short sale occurs when you sell borrowed property, typically securities such as stocks, and later acquire and deliver substantially identical property to close the transaction. Short sales have special tax reporting rules that determine whether any resulting gain or loss is treated as short-term or long-term.
Understanding how a short sale is taxed can help you accurately report your investment activity and avoid filing errors.
How Are Short Sales Taxed?
In most cases, your holding period is based on how long you held the property that was ultimately delivered to close the short sale.
However, any gain from a short sale is generally treated as short-term capital gain if either of the following applies:
- You held substantially identical property for one year or less on the date of the short sale.
- You acquired substantially identical property after the short sale but on or before the date the short sale was closed.
These rules can affect the tax rate applied to your gain, so it's important to review your investment records carefully.
What Happens if I Have a Loss on a Short Sale?
If you held substantially identical property for more than one year on the date of the short sale, any loss realized when the short sale closes is generally treated as a long-term capital loss, even if the property delivered to close the transaction was held for one year or less.
The holding-period rules for short sales can be complex, especially when multiple purchases and sales of similar securities are involved.
When Is a Short Sale Reported?
A short sale is reported in the tax year the transaction is closed, not necessarily the year the short sale was opened.
Short sales entered into after 2010 are generally reported on Form 1099-B in the year the security is delivered to satisfy the short sale obligation, unless backup withholding applies.
Because reporting occurs when the transaction closes, your Form 1099-B may not reflect the short sale activity until a later tax year.
How Do I Report a Short Sale in TaxSlayer?
To enter Form 1099-B information for a short sale in TaxSlayer:
- Select Federal.
- Select Income and choose My Forms.
- Select Investments.
- Choose Stocks, Mutual Funds, Cryptocurrency, Collectibles, etc.
Enter the information exactly as it appears on your Form 1099-B and review any adjustments or holding-period information reported by your broker.
Before You File
Short sales often involve unique reporting requirements and adjustments. Before filing your return:
- Review your Form 1099-B carefully.
- Verify the holding period is reported correctly.
- Confirm whether the gain or loss should be treated as short-term or long-term.
- Compare the information entered in your return to your brokerage records.
Accurate reporting helps ensure your capital gains and losses are calculated correctly and reduces the likelihood of IRS correspondence later.