By Sonsa Lepkowski, CPA, Yohalem Gillman & Company, CPAs

How is selling short against the box different from selling short? When selling short against the box, the seller is in both a long and short position in the same stock. The motive of selling short against the box is to preserve a capital gain and defer taxation until a future date. This hedging technique may delay the recognition of a capital gain to a different tax period or until a more favorable time, such as when there is a reduction in tax rates.

When selling short, the seller has no long position (ownership) of the security, until some future date when the number of shares sold are purchased in the market. In this case, the motive is to make a profit by selling the borrowed securities at a higher price than the price that will have to be paid to purchase the security. The result is a short-term capital gain or loss, regardless of when the property used in closing the short sale is acquired.

When selling short against the box, the capital gain can be either short-term or long-term, depending on how long the underlying security that was sold short is held. Under the current tax law, a short sale against the box can remain open until death. At that time, the estate gets a step up in basis and the capital gains tax may never be paid. Under legislation proposed earlier this year, a short sale against the box would no longer be allowed to remain open until death. Therefore, this planning technique may only be available for a limited time.