IRS INSTRUCTIONS ABOUT SHORT SALES AND OPTIONS

Short Sales

A short sale is a contract to sell property you borrowed for delivery to a buyer. At a later date, you either buy substantially identical property and deliver it to the lender or deliver property that you held but did not want to transfer at the time of the sale.

Example.

You think the value of XYZ stock will drop. You borrow 10 shares from your broker and sell them for $100. This is a short sale. You later buy 10 shares for $80 and deliver them to your broker to close the short sale. Your gain is $20 ($100 − $80).

 

Holding period.   Usually, your holding period is the amount of time you actually held the property eventually delivered to the lender to close the short sale. However, your gain when closing a short sale is short term if you (a) held substantially identical property for 1 year or less on the date of the short sale, or (b) acquired property substantially identical to the property sold short after the short sale but on or before the date you close the short sale. If you held substantially identical property for more than 1 year on the date of a short sale, any loss realized on the short sale is a long-term capital loss, even if the property used to close the short sale was held 1 year or less.

Reporting a short sale.   Report any short sale on Form 8949 in the year it closes.   If a short sale closed in 2011 but you did not get a 2011 Form 1099-B (or substitute statement) for it because you entered into it before 2011, report it on a Form 8949 with box C checked. In column (a), enter (for example) “100 sh. XYZ Co.–2010 short sale closed.”

Gain or Loss From Options

Report on Form 8949 gain or loss from the closing or expiration of an option that is not a section 1256 contract but is a capital asset in your hands. If an option you purchased expired, enter the expiration date in column (d) and enter “EXPIRED” in column (e). If an option that was granted (written) expired, enter the expiration date in column (c) and enter “EXPIRED” in column (f). Fill in the other columns as appropriate. See Pub. 550 for details.

If a call option you sold was exercised and the option premium you received was not reflected in the sales price shown on the Form 1099-B (or substitute statement) you received, enter the premium as a positive number in column (g) of Form 8949. Enter “O” in column (b).

Example.

For $10, you sold Joe an option to buy one share of XYZ stock for $80. Joe later exercised the option. Enter $80 in column (e) of Form 8949. Enter “O” in column (b) and $10 in column (g). Complete the other columns according to the instructions.

Undistributed Capital Gains

Include on Schedule D, line 11, the amount from box 1a of Form 2439. This represents your share of the undistributed long-term capital gains of the regulated investment company (including a mutual fund) or real estate investment trust.

If there is an amount in box 1b, include that amount on line 11 of the Unrecaptured Section 1250 Gain Worksheet if you complete line 19 of Schedule D.

If there is an amount in box 1c, see Exclusion of Gain on Qualified Small Business (QSB) Stock, later.

If there is an amount in box 1d, include that amount on line 4 of the 28% Rate Gain Worksheet if you complete line 18 of Schedule D.

Include on Form 1040, line 71, or Form 1040NR, line 67, the tax paid as shown in box 2 of Form 2439. Also check the box for Form 2439. Add to the basis of your stock the excess of the amount included in income over the amount of the credit for the tax paid. See Pub. 550 for details.