An investor that had an appreciated position that he wanted to sell but didn't want to incur a taxable gain for could enter into a short sale against the box
This article explains the new law and whether the short sale against the box has survived.
Before the TRA '97, a short sale against the box transaction generally was used to defer capital gains tax on the disposition of a long position.
Prior to the TRA '97, a taxpayer generally did not recognize immediate gain on a short sale against the box.
The character of the gain or loss realized on the July 1, 1999 sale of the long position would be long-term, because the short sale against the box was not deemed to be a constructive sale and the ABC stock had a long-term holding period when the short sale was entered into.
Gluttonous investors should heed its advice because Congress, through its enactment of the Taxpayer Relief Act of 1997,(2) has taken aim at the tax benefits once reaped by engaging in short sale against the box transactions.
Fundamentally, section 1259 does not address directly the true abusive practices involved in the Lauder transaction--the ability to sell short against the box indefinitely without any possibility of being squeezed;(17) the opportunity to obtain the proceeds from the short sale against the box before the transaction is closed;(18) and, finally, the combination of Revenue Ruling 72-478(19) and section 1014 of the Internal Revenue Code ("the Code").
A short sale against the box is mechanically identical to a plain short sale with one important exception.
85) Section 1259 is a response to the short sale against the box transaction that the Lauders used as part of Estee Lauder Companies' IPO.
A short sale against the box enables an investor to eliminate the investment risk inherent in the shares of stock used in the transaction.
Under current tax law, a short sale against the box is not treated as a sale or exchange until the short sale is closed (Regs.
Whether the gain or loss recognized from a short sale against the box is capital gain or loss depends on whether the property used to close the short sale is a capital asset in the hands of the short seller.