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Is there ever a situation where the capital appreciation from shorting a stock would be considered long term?

My understanding is that the "holding period" for the stock is the length of time the stock bought to close out the short sale is held. Since the close out usually happens immediately, this implies that any gain is taxed as a short term gain.

I am wondering if there are any exceptions to this. For example, what if the stock is shorted for some period of time, and later shares are bought long and held for > 1 year. After that year, the short is closed out using the bought shares. Would this be considered a long term capital gain, or would it be considered "constructive?"

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    I would guess, from the talk of long/short-term CGT rates, that you're talking about the USA, but can you add a location-tag to confirm this, please. – TripeHound Sep 4 at 7:06
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Short answer: yes.

Your last paragraph makes me unsure whether or not you know how shorting works, though.

Generally you open a position by buying a stock and you pay long term capital gains tax if you hold that stock (or have an open position) for over a year.
If you short a stock you're selling a stock you don't own (to open a position) and then later you buy the stock to close the position. It's possible to have an open short position for a significant amount of time.

You close the short position by buying the stock. If you buy more stock than you shorted you are opening a long position (unrelated to your short position), which you need to then hold for over a year to pay long term capital gains tax.
Do note that this isn't a common thing because you're likely paying 8% or so in interest on a short position. So it's likely better to not have a short position for more than a year.

  • You are right that I am a novice in this area. Your answer does not comport with my google searches (e.g. thismatter.com/money/tax/short-sales-taxation.htm), which say that the capital gains holding period is NOT started when you open the short position, rather it is started when you buy the shares used to replace the borrowed shares. – Ian Fellows Sep 4 at 23:23
  • You don't have an open position when you buy back the shares. You buy to close the position. How are you taxed on shares you don't have ? – xyious Sep 5 at 19:11
  • That whole website also makes no sense to me at all. One of the examples is buying 100 shares, then shorting 100 shares, then buying to close the short position while still holding the long position.... And somehow that's supposed to be different than selling the 100 shares and then buying them again. And it doesn't consider interest on the margin account of the short sale. – xyious Sep 5 at 19:18

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