Title 26 — Internal Revenue CodeRelease 119-73not60
§1233 Gains and Losses From Short Sales
Title 26 › Subtitle 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
When you make a short sale, any gain or loss counts as a capital gain or loss if the thing you use to close the short sale (for example a stock or a commodity future) is a capital asset for you. If, on the day you shorted, you already held the same kind of property for not more than 1 year, or you buy the same kind of property after the short sale but before you close it, then any gain when you close the short sale is treated as short-term (held for not more than 1 year). The holding period for those matching items starts on the closing date (or on the date you sell, give away, or otherwise dispose of them), and the rule applies in the order you acquired the items, up to the amount you sold short. If you held the matching property for more than 1 year when you made the short sale, then any loss when you close is treated as long-term (more than 1 year). These rules apply only to stocks, securities, and commodity futures that are capital assets for you, and they do not include positions covered by section 1092(b). A few special rules also apply. An option to sell bought the same day as the identified property and exercised only by selling that identified property is treated differently; if the option is not exercised, you add the option cost to the property’s basis (this applies to options bought after August 16, 1954). Securities futures contracts are treated as the same kind of property; entering one to sell counts as a short sale and its settlement closes the short. Commodity futures with different delivery months are not treated as identical. For individual taxpayers the rules treat the taxpayer and spouse together unless they are legally separated. Dealers in securities have a special rule: if they short stock while holding identical stock for not more than 1 year and close the short more than 20 days later, the short-term rule applies. Arbitrage short sales follow special ordering and record rules and are limited to assets held for arbitrage. Hedging in commodity futures is excluded. If you have an open short sale and the property becomes substantially worthless, the IRS cannot assess a related deficiency before the earlier of (a) 3 years after you notify the IRS of the worthlessness or (b) 6 years after you filed the return, and the IRS may assess the deficiency despite other timing rules.
Full Legal Text
Title 26, §1233
Internal Revenue Code — Source: USLM XML via OLRC
(a)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)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)any gain on the closing of such short sale shall be considered as a gain on the sale or exchange of a capital asset held for not more than 1 year (notwithstanding the period of time any property used to close such short sale has been held); and
(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.
(c)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)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)(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,
(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.
(f)In the case of a short sale which had been entered into as an arbitrage operation, to which sale the rule of subsection (b)(2) would apply except as otherwise provided in this subsection—
(1)subsection (b)(2) shall apply first to substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, and only to the extent that the quantity sold short exceeds the substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, shall the holding period of any other such identical assets held by the taxpayer be affected;
(2)in the event that assets acquired for arbitrage operations are disposed of in such manner as to create a net short position in assets acquired for arbitrage operations, such net short position shall be deemed to constitute a short sale made on that day;
(3)for the purpose of paragraphs (1) and (2) of this subsection the taxpayer will be deemed as of the close of any business day to hold property which he is or will be entitled to receive or acquire by virtue of any other asset acquired for arbitrage operations or by virtue of any contract he has entered into in an arbitrage operation; and
(4)for the purpose of this subsection arbitrage operations are transactions involving the purchase and sale of assets for the purpose of profiting from a current difference between the price of the asset purchased and the price of the asset sold, and in which the asset purchased, if not identical to the asset sold, is such that by virtue thereof the taxpayer is, or will be, entitled to acquire assets identical to the assets sold. Such operations must be clearly identified by the taxpayer in his records as arbitrage operations on the day of the transaction or as soon thereafter as may be practicable. Assets acquired for arbitrage operations will include stocks and securities and the right to acquire stocks and securities.
(g)This section shall not apply in the case of a hedging transaction in commodity futures.
(h)(1)If—
(A)the taxpayer enters into a short sale of property, and
(B)such property becomes substantially worthless,
(2)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
Apr 5, 2026
Release point: 119-73not60