7525 / When and how is a short sale taxed?
Generally, if a taxpayer holds an appreciated financial position (see Q 7617) that is the same as or substantially identical to the property sold short, the short sale will be treated as a constructive sale of that position, unless certain requirements are met for closing out the short position.1 Furthermore, if a taxpayer holds a short sale position that has appreciated, the acquisition of the same or substantially identical property (e.g., to cover the short sale) constitutes a constructive sale of the short sale position, which is subject to the same rules.2
Unless certain exceptions apply, a constructive sale results in immediate recognition of gain as if the position were sold, assigned, or otherwise terminated at its fair market value on the date of the constructive sale.3 For an explanation of the constructive sale rules for appreciated financial positions under IRC Section 1259, see Q 7617 to Q 7621.
A sale of appreciated stock “short against the box” constitutes a constructive sale of an appreciated financial position (see Q 7617 to Q 7621).4 (Under earlier law, short sales against the box were taxed as a short sale.)5