Short sales. (Line Items).

* In revenue ruling 2002-44 the IRS has provided two "fact patterns" that help explain when a taxpayer realizes a gain or loss on a short sale of stock. Both examples involve a taxpayer who entered into a short sale and directed his or her broker to purchase the stock sold short and close out the sale.

In the first example, according to Treasury regulations section 1.12331(a)(1), the short sale is not consummated until the short seller delivers the stock to close it. While the taxpayer is treated as having acquired the stock on the trade date, he or she won't actually deliver the stock to close the short sale until a specified date. As a result, the taxpayer doesn't realize a loss on the transaction until that date.

In the second situation, a taxpayer constructively "sells" the short sale on December 31 of a specified year by acquiring the same or substantially identical stock as the shares underlying the short sale. Under these circumstances the taxpayer realizes gain in that year as if he or she had sold, assigned or otherwise terminated the sale at its fair market value on December 31.