In a short sales investment, your intention is to register profit by selling assets that you do not own, usually securities. Later, you will buy identical assets and return them to the lender.
If the asset’s price declines, you will have profit because of paying less for the assets at the sale date. If the asset’s price rises, you will have to pay the difference between the price at the time you borrowed and the price at the time you actually bought them.
Short Sale Investment - Capital Gain Or Loss
Your profit becomes taxable when you deliver the securities you owe to the lender and close the sale.
The loss or gain of capital on a short sales investment will be calculated considering the amount of time you held the securities you borrowed, before you closed the short sale. For example, you buy 10 securities from your brokerage firm and you hold them for more than a year. As the securities price goes up, you buy them and decide to return them immediately to your lender. In this case, the profit you might have registered is considered a capital gain on a short sale.
There are particular rules regarding the capital gain or loss from securities, assets or stocks you held. This applies only if, at the moment you close the short sales, the property you return is identical with the property you held.
Special rules apply, under certain circumstances, for gains and holding period.
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