Short sale

What is a short sale against the box? why it’s called that?

It’s a short sale where you own the asset you’re selling short.

For example: you own 10,000 shares of stock in company ABC, but you have a very low basis, so if you sell them you’ll pay a ton of taxes. You borrow shares of ABC stock and sell them short.

“You borrow shares of ABC stock and sell them short.”-that’s what I don’t understand. When you have the stock, why borrow-and how does that work? the dealer just let you have it so that you can sell? and when you can sell, it also triggers tax liability- does it not ?

The borrowing and selling works just like any other short sale: you borrow shares from a dealer, sell them, then buy them back later to return them to the dealer. You also pay rent on the shares while you’re using them.

It doesn’t trigger a tax liability because you’re not selling your shares.

Ok. You can do this with any shares-then why ABC shares which you own-what’s the connection here?

you hedging kid cuz, this aint rocket science.

You are trying to monetize and/or hedge a concentrated position. Doing this allows you to monetize the asset without triggering tax liabilities. With the short proceeds you can then invest in a diversified portfolio to earn the market rate of return with a 100% LTV on your ABC stock position.

CFA says this stretegy is riskless. How?

You own the stock

You borrow the same position from someone else and sell it short. You owe the dealer the stock position yet you already have it in your possession.

Long stock + short stock = no position

What is the purpose of this strategy now? Isn’t it no longer a valid tax deferral practice since the Taxpayer Relief Act of 1997 was put in place?

Correct - no longer allowed

Agree with Galli - You are both long and short on the same stock - so net position is nil.

The goal was to defer the capital gains on your Long position

Quick question. What about the short proceeds an investor will get by shorting the stock? Does that just sit in the margin account while investor is taking out a new loan with high LTV ratio against the riskless position?