What Is a Short Sell Against the Box?

A short sell against the box is the act of short selling securities that you already own, but without 澳洲幸运5官方开奖结果体彩网:closing out the existing lon🎀g position. This results in a neutral position where all gains in a stock are equal to the losses and net to zero.

The purpose is to avoid realizing capital gains from a sale to close, so it has been restricted by regulators in practice. For example, if you own 100 shares of Company ABC and you tell your broker to sell short 100 shares of ABC without selling your long position, you conducted a short sale against the box—with the long position in one account and th🌌e short position in another.

Understanding a Short Sell Against the Box

A short sell against the box, also known as “shorting against the box,” is a tax minimization or 澳洲幸运5官方开奖结果体彩网:avoidance technique used by traders when they do not actually want to close out their long position on a stock. By selling short in a different account and maintaining the long position, no capital gains are realized and any new gains produced by one accoun🦩t will be equally offset by losses in the other.

The strategy is also utilized by 澳洲幸运5官方开奖结果体彩网:investors who believe that a stock they own is due for a fall in price, but do not wish to sell because they🦹 believe the fall is temporary and the stock will rebound quickly.

Restrictions and Tax Avoidance

Prior to 1997, the main rationale for shorting against the box was to delay a 澳洲幸运5官方开奖结果体彩网:taxable event. According to tax laws that preceded that year, owning both long and short positions in a stock meant that any paper gains from the 澳洲幸运5官方开奖结果体彩网:long position would be removed temporarily due to the offsetting 澳洲幸运5官方开奖结果体彩网:short position. The net effect of both positions was zero, meaning tꦯhat no taxes had to be paid.

The 澳洲幸运5官方开奖结果体彩网:Taxpayer Relief Act of 1997 no longer allowed short selling against the box as a valid tax deferral practice. Under the act, capital gains or 澳洲幸运5官方开奖结果体彩网:losses incurred from short selling against the box are not deferred. The tax implication is that any related 澳洲幸运5官方开奖结果体彩网:capital gains taxes will be owed in the current year.

The 澳洲幸运5官方开奖结果体彩网:Securities and Exchange Commission (S﷽EC) and the 澳洲幸运5官方开奖结果体彩网:Financial Industry Regulatory Authority (FINRAꦅ) further regulated when sellers are allowed to sell short. For instance, in February 2010, the SEC adopted the alternative uptick rule, which restricts short selling when a stock drops more than 10% in one day. In that situation, those engaging in a short sale (even if the shares are already owned) usually must open a 澳洲幸运5官方开奖结果体彩网:margin account.

A viable alternative strategy is instead buying a 澳洲幸运5官方开奖结果体彩网:put option, which gives investors the right, but not the obligation, to sell the shares. Buying a put option has a per-share cost associated with it, which is comparable to a 澳洲幸运5官方开奖结果体彩网:short sale transaction. However, like all strategies that use options, put options are subject to the effects of 澳洲幸运5官方开奖结果体彩网:time decay. This represents a cost that must be managed in or✅der for options strategies to work eff🍎ectively.

Example of Shorting Against the Box

As an example, say you have a big paper gain on shares of Company ABC in your main brokerage account, which is not a margin account. You think that ABC has reached its peak, and you want to sell. However, there will be a tax on the 澳洲幸运5官方开奖结果体彩网:capital gain. Perhaps the next year you expect to make a lot less money, putting you in a lower bracket. It is more beneficial to 🐓take the gain once you enter a lower tax bracket.

To lock in your gains this year, you short the ABC shares in your margin account. As is customary, you borrow shares from a broker. When your bet (hopefully) comes true, you return the shares that you alr♓eady owned before the short to the broker, thereby circumventing the taxable event.🥀

The Bottom Line

A short s🦂ell against the box is a strategy used by investors to minimize or avoid their tax liabilities on capital gains by shorting stocks they already own. The existing long position is not closed out, resulting in a neutral position where all gains in a stock are equal to the losses and net to zero. It has been restricted by regulators in practice, because the purpose is to avoid realizing capital gains from a sale to close.