A short sale of stock involves shares that you don't actually own: You borrow shares from someone else to sell today. In exchange, you promise to repay the shares at some point in the future. You use a short sale to make money if you expect a stock's price to go down. You sell the borrowed shares today and buy them back at a lower price in the future to settle your debt. Short sales are common stock transactions and are as easy to report to the IRS as a regular stock sale.
Review the Form 1099-B from your short sale. This form is sent to you by your broker in January of the year after your transaction. It will list the total gain or loss from your short sale.
List the completed short sale on your Schedule D. Provide the date you sold the stock, the day you bought the stock and the value of the stock on each day. This can seem strange because you are listing the sale day before the purchase day. However, the IRS will understand it's a short sale.
Complete your Schedule D by listing the gains and losses from any other stock sales throughout the year. Subtract your total losses from your total gains to find your net investment gain or loss for the year.
Transfer your net gain or loss to line 13 of your Form 1040 to complete the reporting of your short sale.
- You are not required to report the short sale on your taxes until you've returned the shares to the lender.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.