Selling Short against the Box versus Selling Short
Lepkowski, Sonsa, The CPA Journal
How is selling short against the box different from selling short? When selling short against the box, the seller is in both a long and short position in the same stock. The motive of selling short against the box is to preserve a capital gain and defer taxation until a future date. This hedging technique may delay the recognition of a capital gain to a different tax period or until a more favorable time, such as when there is a reduction in tax rates.
When selling short, the seller has no long position (ownership) of the security, until some future date when the number of shares sold are purchased in the market. In this case, the motive is to make a profit by selling the borrowed securities at a higher price than the price that will have to be paid to purchase the security. The result is a short-term capital gain or loss, regardless of when the property used in closing the short sale is acquired.
When selling short against the box, the capital gain can be either short-term or long-term, depending on how long the underlying security that was sold short is held. …