CU professor calls “BS” on Romney’s 13 percent tax rate claim

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53. you close out the short a and then re-establish it for the same amount 31 days later.

whatever you get out of "short a", in your example $50, you put back on 31 days later to re-establish the hedge.

the way you're describing the short a position is confusing, because on the one hand it's $50 while the long a is $150, on the other hand it's still a perfect hedge regardless of the price of a (until you sell it).

here's how i'd describe the cash:

(I) deposit money
$500 cash
= $500 total cash

(II) establish real and artificial positions
($100) cash -- long r
($100) cash -- long a
$100 cash -- short a (you get proceeds from selling stock)
= $400 total cash

(III) everything goes from $1/share to $1.50/share, close real profit and artificial loss
$150 -- close long r
($150) -- close short a (you buy back the stock at a higher price)
= $400 total cash

(IV) after 31 days, re-establish the artificial hedge
$150 cash -- short a (proceeds from selling stock)
= $550 total cash


you physically have realized your gain of $50, but for tax purposes you have offsetting gaines and losses (long r/short a). the re-established hedge has a floating gain of $50 which you can defer until whenever you want.







this is actually all just a variant of selling against the box, which is simpler:

(I) deposit money
$500 cash
= $500 total cash

(II) establish real position in one account
($100) cash -- long r
= $400 total cash

(III) r goes from $1/share to $1.50/share, short r in a DIFFERENT account
($150) -- open short a (proceeds from selling)
= $550 total cash

now you have physically realized your $50 profit but you haven't closed out any positions at all so of course this is not a tax event at all.

well, the point of this thread is the such strategies are disallowed by the irs -- they consider the short to have closed out the long position even though it's in a different account.


my understanding has been that this is disallowed as of 1997 changes in the tax code, see the first exerpted paragraph below. however, the second exerpted paragraph below describes a "loophole", so maybe it's not entirely disallowed after all. in any event, i still wouldn't do it, still wouldn't recommend it, still think it's slimy, and certainly wouldn't base any decisions as to its legality based on my non-lawyerly posts.



http://www.invest-faq.com/articles/trade-short-box.html

The 1997 revisions to the tax code define (or extend) the idea of "constructive sales." A constructive sale is a set of transactions which removes one's risk of loss in a security even if the security wasn't actually disposed of. Shorting against the box as well as certain options and futures transactions are defined as being constructive sales. And any constructive sale is interpreted as being the same as a real sale, which is why this strategy is no longer effective (don't you hate it when the rules change in the middle of the game?).


For those who have read this far, there does appear to be a small loophole in the 1997 revisions that permit shorting against the box to delay a taxable event. If you have a short against the box position and then buy in the short within 30 days of the start of the tax year and leave the long position at risk for at least 60 days before ofsetting it again, the constructive sales rules do not apply. So it appears that you can continue shorting against the box to defer gains, but you have to temporarily cover the short and be exposed for at least 60 days at the beginning of each and every year.