How to Short Sell Against the Box
By Trevor Onions
, last updated January 10, 2012
Short selling against the box is a useful investment strategy that can help savvy money movers avoid losses and strengthen profits. Not everyone, however, has a sound understanding of how to short sell against the box. Executing the strategy correctly is vital, since doing it wrong could land you in trouble for bending the rules governing stock sales.
What is Short Selling Against the Box?
The term, like many in business circles, usually sounds strange to outsiders. Short selling against the box actually refers to holding long term shares of stock while selling short at the same time. Its origin comes from the old days before electronic trading. When investing was done with paper and cables, many folks kept their physical shares in a deposit box.
Tips for a Successful Strategy
The main goal of short selling against the box is to hedge against losses and reap profits on shares held for longer intervals. In essence, the investor selling against the box owns the stock, but never truly closes out their overall position with the short sales.
This strategy can be an excellent way to balance your stock portfolio when it's implemented correctly. The biggest threat to short selling against the box comes from tax rules created just over a decade ago. The IRS (Internal Revenue Service) has extended their definition of constructive sales, where investors have little true risk, over selling against the box. This means these shorts are taxable events.
Still, there are a few loopholes ignored by revisions to the tax code. The best time to try short selling against the box is near the start of a new year. Your short sales should be combined with purchasing the short within thirty days after a tax year starts. If your long position is left exposed in sixty day intervals before shorting it again, you avoid a constructive sale.
Short selling against the box requires good timing and knowledge of IRS regulations. Make sure you're well versed in taxes affecting short sales before trying this strategy.