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A stock sale tax may be incurred from the short sale of stock. This occurs when stock sold short is repurchased and results in a profit. All gains in a stock sale or purchase are subject to tax treatment as soon as that gain is earned.
Short Selling
Short selling is a process where a person sells a stock they do not own. This takes place in an account known as a margin account, which is a credit account maintained by a brokerage firm for a customer. The brokerage firm uses the account to borrow the shares being sold short.
Presumably, the shares are sold at a price that is higher than the price that the shares are repurchased. This creates a profit from the short sale for the seller. For example, 100 shares of XYZ stock are sold short at $50 in a margin account. The seller purchases the shares when XYZ falls to $30 per share. This results in a $2,000 profit (100 shares × $20 = $2,000).
Short-Term vs. Long-Term Gains
When a gain is received determines how it is taxed. Short-term gains are those profits realized within 1 year while long-term gains occur when realized in more than 1 year. This is important because under current tax law, long-term gains are taxed at a maximum 15 percent rate and short-term gains are taxed at a maximum of 35 percent.
Short Selling
Short selling is a process where a person sells a stock they do not own. This takes place in an account known as a margin account, which is a credit account maintained by a brokerage firm for a customer. The brokerage firm uses the account to borrow the shares being sold short.
Presumably, the shares are sold at a price that is higher than the price that the shares are repurchased. This creates a profit from the short sale for the seller. For example, 100 shares of XYZ stock are sold short at $50 in a margin account. The seller purchases the shares when XYZ falls to $30 per share. This results in a $2,000 profit (100 shares × $20 = $2,000).
Short-Term vs. Long-Term Gains
When a gain is received determines how it is taxed. Short-term gains are those profits realized within 1 year while long-term gains occur when realized in more than 1 year. This is important because under current tax law, long-term gains are taxed at a maximum 15 percent rate and short-term gains are taxed at a maximum of 35 percent.
