New Ruling Regarding Gain, Loss on Short Sales of Stock

The Internal Revenue Service has released Revenue Ruling 2002-44 in which it sets out in detail the exact way in which gain and loss is to be realized in the case of a short sale of stock.

The ruling provides two examples, one in which the taxpayer concludes the short sale with a loss, and the other in which the sale is concluded with a gain for the taxpayer.

A short sale is one in which in which the taxpayer borrows stock certificates that are delivered to the buyer. At a later date, the taxpayer purchases stock or delivers shares of stock previously owned to replace those shares supplied by the lender.

If the stock declines in value from the time the taxpayer initiated the short sale to the time the stock used to cover the sale is actually purchased, the taxpayer reports a taxable gain on the sale. If the stock increases in value, the taxpayer realizes a loss on the sale.

The dates on which the stock is purchased and delivered are significant for purposes of reporting the sale. In the case of a short sale that generates a loss to the taxpayer, the sale is to be recorded when the stock is delivered to the lender, typically some days after the order to purchase the stock occurs. In the case of a short sale that generates a gain to the taxpayer, the sale is to be recorded on the date the taxpayer issues a purchase order for the stock.


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