Short Sales, Commodity Sales, and Straddles

A short sale occurs when you sell property that you don't actually have, or don't wish to part with at the present time. The sale occurs in two steps. First you make the sale, and then at some later date, you close the sale by either buying the promised property and delivering it to the buyer, or giving up some property you already own.

Generally, a short sale is taxable at the time the property is delivered (the second step, above). The amount of time you actually held the property delivered to the buyer determines whether it's a long-term or short-term gain or loss.

A straddle is any set of offsetting positions on personal property (generally, stock or other securities). For example, a straddle can consist of a call option and a put option written at the same time on the same number of shares. Generally, you can deduct a loss on one position only to the extent that it exceeds unrecognized gains you have in offsetting positions.

The wash sale rules take on special significance in the context of short sales. Moreover, numerous other technical rules apply to short sales, straddles, and to sales of options and commodities. If you are involved in any of these types of investments, we suggest you talk to your tax advisor or get the IRS's free Publication 550, Investment Income and Expenses, for more information.