Title 26, Internal Revenue CodeRelease 119-110
§1233 Gains and Losses From Short Sales
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter P — Capital Gains and Losses › PART IV — SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES › § 1233
Summary
Treats gain or loss on a short sale as a capital gain or loss when the thing used to close the short sale is a capital asset for the taxpayer. If, on the date of the short sale, the taxpayer already held substantially identical property for not more than 1 year, or buys such property after the short sale but before it is closed, any gain on closing the short sale is treated as short-term (held not more than 1 year). The holding period for those identical items starts on the date the short sale is closed (or on the date the identical item is sold, given away, or otherwise disposed of), and this rule applies in the order the identical items were acquired, only up to the amount sold short. An option to sell at a fixed price counts as a short sale, and exercising or not exercising that option counts as closing it. An option bought the same day as the identified underlying property, and exercised by selling that same property, is not covered; if that option is not used, its cost is added to the basis of the identified property (applies only to options bought after August 16, 1954). If the taxpayer held substantially identical property for more than 1 year on the short sale date, any loss on closing the short sale is treated as long-term (held more than 1 year). The short-term or long-term treatment only applies to amounts that match the quantity of substantially identical property. “Property” here means stocks, securities, and commodity futures that are capital assets (but not positions covered by section 1092(b)). Different delivery months for commodity futures are not treated as substantially identical. For individuals, the rule looks at the taxpayer and his or her spouse together unless legally separated. Securities futures contracts that acquire or sell substantially identical property are treated as substantially identical property or as short sales. Dealers and arbitrage traders have special ordering and timing rules (including a 20-day rule for dealers). Hedging in commodity futures is excluded. If the shorted property becomes substantially worthless while the short sale is open, the taxpayer must report gain as if the short sale closed then, and the IRS has extended time limits to assess tax: the assessment period won’t end before the earlier of 3 years after the taxpayer notifies the IRS of the worthlessness or 6 years after the tax return was filed.
Full Legal Text
Title 26, §1233
Internal Revenue Code, Source: USLM XML via OLRC
(a)Capital assets
For purposes of this subtitle, gain or loss from the short sale of property shall be considered as gain or loss from the sale or exchange of a capital asset to the extent that the property, including a commodity future, used to close the short sale constitutes a capital asset in the hands of the taxpayer.
(b)Short-term gains and holding periods
If gain or loss from a short sale is considered as gain or loss from the sale or exchange of a capital asset under subsection (a) and if on the date of such short sale substantially identical property has been held by the taxpayer for not more than 1 year (determined without regard to the effect, under paragraph (2) of this subsection, of such short sale on the holding period), or if substantially identical property is acquired by the taxpayer after such short sale and on or before the date of the closing thereof— (1)
(2)the holding period of such substantially identical property shall be considered to begin (notwithstanding section 1223, relating to the holding period of property) on the date of the closing of the short sale, or on the date of a sale, gift, or other disposition of such property, whichever date occurs first. This paragraph shall apply to such substantially identical property in the order of the dates of the acquisition of such property, but only to so much of such property as does not exceed the quantity sold short.
For purposes of this subsection, the acquisition of an option to sell property at a fixed price shall be considered as a short sale, and the exercise or failure to exercise such option shall be considered as a closing of such short sale.
(c)Certain options to sell
Subsection (b) shall not include an option to sell property at a fixed price acquired on the same day on which the property identified as intended to be used in exercising such option is acquired and which, if exercised, is exercised through the sale of the property so identified. If the option is not exercised, the cost of the option shall be added to the basis of the property with which the option is identified. This subsection shall apply only to options acquired after August 16, 1954.
(d)Long-term losses
If on the date of such short sale substantially identical property has been held by the taxpayer for more than 1 year, any loss on the closing of such short sale shall be considered as a loss on the sale or exchange of a capital asset held for more than 1 year (notwithstanding the period of time any property used to close such short sale has been held, and notwithstanding section 1234).
(e)Rules for application of section (f) Arbitrage operations in securities
(1)Subsection (b)(1) or (d) shall not apply to the gain or loss, respectively, on any quantity of property used to close such short sale which is in excess of the quantity of the substantially identical property referred to in the applicable subsection.
(2)For purposes of subsections (b) and (d)—
(A)the term “property” includes only stocks and securities (including stocks and securities dealt with on a “when issued” basis), and commodity futures, which are capital assets in the hands of the taxpayer, but does not include any position to which section 1092(b) applies;
(B)in the case of futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange, a commodity future requiring delivery in 1 calendar month shall not be considered as property substantially identical to another commodity future requiring delivery in a different calendar month;
(C)in the case of a short sale of property by an individual, the term “taxpayer”, in the application of this subsection and subsections (b) and (d), shall be read as “taxpayer or his spouse”; but an individual who is legally separated from the taxpayer under a decree of divorce or of separate maintenance shall not be considered as the spouse of the taxpayer;
(D)a securities futures contract (as defined in section 1234B) to acquire substantially identical property shall be treated as substantially identical property; and
(E)entering into a securities futures contract (as so defined) to sell shall be considered to be a short sale, and the settlement of such contract shall be considered to be the closing of such short sale.
(3)Where the taxpayer enters into 2 commodity futures transactions on the same day, one requiring delivery by him in one market and the other requiring delivery to him of the same (or substantially identical) commodity in the same calendar month in a different market, and the taxpayer subsequently closes both such transactions on the same day, subsections (b) and (d) shall have no application to so much of the commodity involved in either such transaction as does not exceed in quantity the commodity involved in the other.
(i)if, on the date of a short sale of stock, substantially identical property which is a capital asset in the hands of the taxpayer has been held for not more than 1 year, and
(ii)if such short sale is closed more than 20 days after the date on which it was made,
subsection (b)(2) shall apply in respect of the holding period of such substantially identical property.
(B)For purposes of subparagraph (A)—
(i)the last sentence of subsection (b) applies; and
(ii)the term “stock” means any share or certificate of stock in a corporation, any bond or other evidence of indebtedness which is convertible into any such share or certificate, or any evidence of an interest in, or right to subscribe to or purchase, any of the foregoing.
(g)Hedging transactions
This section shall not apply in the case of a hedging transaction in commodity futures.
(h)Short sales of property which becomes substantially worthless
(1)In general
If—
(A)the taxpayer enters into a short sale of property, and
(B)such property becomes substantially worthless,
the taxpayer shall recognize gain in the same manner as if the short sale were closed when the property becomes substantially worthless. To the extent provided in regulations prescribed by the Secretary, the preceding sentence also shall apply with respect to any option with respect to property, any offsetting notional principal contract with respect to property, any futures or forward contract to deliver any property, and any other similar transaction.
(2)Statute of limitations
If property becomes substantially worthless during a taxable year and any short sale of such property remains open at the time such property becomes substantially worthless, then—
(A)the statutory period for the assessment of any deficiency attributable to any part of the gain on such transaction shall not expire before the earlier of—
(i)the date which is 3 years after the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the substantial worthlessness of such property, or
(ii)the date which is 6 years after the date the return for such taxable year is filed, and
(B)such deficiency may be assessed before the date applicable under subparagraph (A) notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2002—Subsec. (e)(2)(E). Pub. L. 107–147 added subpar. (E). 2000—Subsec. (e)(2)(D). Pub. L. 106–554 added subpar. (D). 1997—Subsec. (h). Pub. L. 105–34 added subsec. (h). 1984—Subsecs. (b), (d), (e)(4)(A)(i). Pub. L. 98–369 substituted “6 months” for “1 year” wherever appearing, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See
Effective Date
of 1984 Amendment note below. 1981—Subsec. (e)(2)(A). Pub. L. 97–34 inserted “, but does not include any position to which section 1092(b) applies” after “taxpayer”. 1976—Subsec. (b). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”. Pub. L. 94–455, § 1402(b)(1)(T), (2), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977. Subsec. (c). Pub. L. 94–455, § 1901(a)(137), substituted “August 16, 1954” for “the date of enactment of this title”. Subsecs. (d), (e)(4)(A)(i). Pub. L. 94–455, § 1402(b)(2), provided that “9 months” would be changed to “1 year”. Pub. L. 94–455, § 1402(b)(1)(T), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977. 1958—Subsec. (a). Pub. L. 85–866, § 52(b), struck out “, other than a hedging transaction in commodity futures,” after “sale of property”. Subsec. (e)(4). Pub. L. 85–866, § 52(a), added par. (4). Subsec. (g). Pub. L. 85–866, § 52(b), added subsec. (g). 1955—Subsec. (f). Act Aug. 12, 1955, added subsec. (f).
Statutory Notes and Related Subsidiaries
Effective Date
of 2002 AmendmentAmendment by Pub. L. 107–147 effective as if included in the provisions of the Community Renewal Tax Relief Act of 2000 [H.R. 5662, as enacted by Pub. L. 106–554], to which such amendment relates, see section 412(e) of Pub. L. 107–147, set out as a note under section 151 of this title.
Effective Date
of 1997 Amendment Pub. L. 105–34, title X, § 1003(b)(2), Aug. 5, 1997, 111 Stat. 910, provided that: “The amendment made by paragraph (1) [amending this section] shall apply to property which becomes substantially worthless after the date of the enactment of this Act [Aug. 5, 1997].”
Effective Date
of 1984 AmendmentAmendment by Pub. L. 98–369 applicable to property acquired after June 22, 1984, and before Jan. 1, 1988, see section 1001(e) of Pub. L. 98–369, set out as a note under section 166 of this title.
Effective Date
of 1981 AmendmentAmendment by Pub. L. 97–34 applicable to property acquired and positions established by the taxpayer after
June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on
June 23, 1981, see section 508 of Pub. L. 97–34, set out as an
Effective Date
note under section 1092 of this title.
Effective Date
of 1976 Amendment Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years beginning in 1977. Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977. Amendment by section 1901(a)(137) of Pub. L. 94–455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title.
Effective Date
of 1958 AmendmentAmendment by section 52(b) of Pub. L. 85–866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) of Pub. L. 85–866, set out as a note under section 165 of this title. Pub. L. 85–866, title I, § 52(c), Sept. 2, 1958, 72 Stat. 1644, provided that: “The amendment made by subsection (a) [amending this section] shall apply with respect to short sales made after December 31, 1957.”
Effective Date
of 1955 AmendmentAct Aug. 12, 1955, ch. 871, § 2, 69 Stat. 718, provided that: “The amendment made by the first section of this Act [amending this section] shall apply only with respect to taxable years ending after the date of the enactment of this Act [Aug. 12, 1955] and only in the case of a short sale of property made by the taxpayer after such date.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 1233
Title 26, Internal Revenue Code
Last Updated
Sep 22, 2026
Release point: 119-110