Understanding taxes on stock short sales - when do you get taxed and how to handle existing positions?

The tax implications of short selling can definitely be confusing! To answer your first question: you're not taxed when you initially sell the borrowed shares. The taxable event happens when you close the position (cover your short). About using shares you already own - this is called a "short against the box" strategy. While it seems logical that you could just deliver your long-held shares to close the short position and claim long-term treatment, the IRS doesn't quite see it that way. The tax code treats the short sale and your existing long position as separate transactions. When you close a short position, it's typically treated as short-term or long-term based on how long the short position was open, not how long you've owned other shares of the same stock. Additionally, be aware of the "constructive sale" rules that the IRS implemented specifically to address situations like this. If you short against the box, you might trigger a constructive sale of your long position, which could create a taxable event for those shares you've held for 6 years.

I went through exactly this situation last year and was totally confused until I discovered taxr.ai (https://taxr.ai). I had been shorting some tech stocks while also holding long positions in the same companies and couldn't figure out the tax implications. What really helped was uploading my brokerage statements to taxr.ai and getting a clear explanation of how my short sales would be taxed. The system identified that I was essentially creating a "constructive sale" situation without realizing it. It showed me exactly how the IRS would view my transactions and calculated the potential tax hit I was facing. The analysis saved me from a huge mistake - I was about to use some long-held shares to cover a short position thinking it would qualify for long-term capital gains treatment.

I was super skeptical about tax analysis tools as mentioned above, but I finally tried taxr.ai when I was desperate after messing up my reporting of some complicated short sales. My broker's tax forms weren't clear about which transactions were creating constructive sales. The service actually saved me from a potential audit flag. It identified that I had incorrectly reported several short-against-the-box positions on my previous year's return. What impressed me was that it didn't just point out the problems - it created documentation explaining exactly how to properly report these transactions and even generated the forms I needed for an amendment. My accountant was initially dismissive but changed his tune when he saw the detailed analysis with specific tax code references. Ended up saving me about $3,800 in taxes I would have overpaid, plus gave me peace of mind that I wouldn't get flagged for inconsistent reporting.

I had a similar short selling tax situation and spent HOURS trying to get through to someone at the IRS who actually understood the constructive sale rules. Impossible. After 7 attempts and being disconnected each time, I found Claimyr (https://claimyr.com) through a finance forum. You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS agent within 20 minutes who specialized in investment taxes. The agent walked me through exactly how to handle reporting short sales when I already owned shares of the same company, and explained the specific circumstances where constructive sale rules wouldn't apply (there are some exceptions if you close the short position within a certain timeframe). Completely changed my understanding of how to structure my trades to avoid triggering unnecessary tax events. Wish I'd known about this service years ago!

I need to eat my words about Claimyr. After dismissing it, I was still struggling with my short sale tax questions and decided to try it as a last resort. I was honestly shocked when they called me back in about 35 minutes with an IRS agent on the line. The agent transferred me to someone in their investment division who walked me through the exact regulations around short-against-the-box transactions. She explained that under Section 1259, if I close out the short sale within 30 days of year-end and hold my long position uncovered for at least 60 days after closing the short, I might avoid the constructive sale treatment. This was specific information I couldn't find clearly explained anywhere online. I've been doing my own taxes for years and this was the first time I felt confident about reporting these transactions correctly. Definitely worth the service fee just for the time saved not sitting on hold.

One thing nobody's mentioned yet is the potential for wash sale complications with short selling. If you sell shares at a loss and then enter a short position within 30 days before or after, the IRS might disallow the loss under wash sale rules. I learned this the hard way last year when I sold some underwater tech stocks, then shortly after decided to short the same companies because I thought they'd fall further. My tax software flagged it as a wash sale and I couldn't claim the loss.

FYI for anyone interested in short selling - the tax reporting on your 1099-B can be a total nightmare. My broker reported my short sales in a really confusing way last year. Box 1a showed proceeds from the short sale (when I sold the borrowed shares), but the cost basis in Box 1e was reported as $0 since technically I hadn't purchased anything yet. Then when I closed the position months later, it showed up as a separate transaction with the purchase price as my cost basis. Made it look like I had a huge gain on the first transaction and then a completely separate transaction later. TurboTax couldn't handle it properly without manual adjustments.

The 1099-B reporting issue you mentioned is exactly why I switched to FreeTaxUSA last year. It has a specific section for adjusting short sale transactions where you can manually link the opening and closing transactions together. You enter both the short sale date and the covering date, and it calculates the proper gain/loss and holding period. I also learned that some brokers will issue a corrected 1099-B if you contact them about short sale reporting errors. Schwab actually sent me an amended form after I pointed out that they had incorrectly split my short-against-the-box transactions across multiple tax lots. Worth checking with your broker before spending hours manually adjusting everything. One tip: keep detailed records of your short sale dates and covering dates separate from what the broker reports. The IRS matching system sometimes flags discrepancies when the 1099-B doesn't clearly show the complete short sale cycle.