A short sale refers to borrowing stocks from another investor and selling them at prevailing prices. If the stock's price declines later, you can buy the same amount of shares back for less, return them to the investor and pocket a profit equal to the decline in the stock's value. Should the stock price advance, you will lose money. Confusion might arise on how to report the short sale if you short the stock during one tax year and buy it back the following year. Naturally, your brokerage statements will show a sale, but there will not yet be a purchase price or net profit or loss to report.
Download Form 8949, "Sales and Other Dispositions of Capital Assets," from the Internal Revenue Service website. You will report the sales proceeds for all trades that occurred during the tax year on this form. If you have purchased a stock, but have not sold it as of the end of the year, the sale will not be reported on this form. However, if you have a short sale, even if you have not yet bought the stock back and the trade is still "open," you must report the sales proceeds from the sale on Form 8949.Step 2
Enter the stock's abbreviation, also known as ticker symbol, in column A in Part 1 on the first page. Leave column B empty, as you haven't sold the stock yet. Column B is for adjustments to the gain or loss associated with the transaction. However, you did not complete the transaction yet. Likewise, leave column C, which is the acquisition date, empty because you have sold, but not yet acquired, the stock. On column D, enter the date you sold the shares, then put the total sales proceeds in column E. Write “Open Short Sale” in Column F, as per IRS instructions. Finally, enter the same value you used in column E, in column F, but place a minus sign in front of it.Step 3
Report the gain or loss from the short sale in the tax filing of a subsequent year. While it is rare for an investor to keep an open short position for more than a year, you can, in theory, cover the short after several years. On the tax return of the year when you buy back the stock, report the gain or loss just as you do for any stock. Your net gain or loss is, as usual for stock transactions, the difference between your net sales proceeds and your net cost. The only difference in case of a short sale is that the sale occurs before the purchase. This, however, does not change the basic math.
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