Pretty straightforward. I am up quite high on a certain stock that I believe is going to fall in the short term but continue to rise in the longer term. I would still like to attempt to make some money on this short term fall. To avoid paying short term capital gains tax on this large return (have held the stock <1 year) and to avoid the emotional anguish of selling a stock I love, I would rather not sell the shares I own. Instead, I would like to short the stock and make a profit on that short which I would be ok with paying short term capital gains on. My question is, does this make sense? Can I short a stock I am long on? Essentially I am looking to have pool A of stock X which I have bought and not sold and pool B of stock X which I have shorted and then rebought later. Can these pools remain separate? Does this even make sense?
What you are considering is called Shorting Against The Box (SATB) . For the purpose of tax deferral, this was made illegal by The Taxpayer Relief Act of 1997 by adding new Section 1259 Constructive Sales Treatment For Appreciated Financial Positions. However, you are not proposing tax deferral. You are looking at the opposite direction.
You would need two brokerage accounts to execute a SATB position because brokers net out long and short positions in the same security. With a SATB, what you make on the short you lose on the long and vice versa. Therefore if your stock dropped, you would have a taxable gain on the short position with an offsetting equivalent loss on the long position. Your net gain would be zero. You would only make money if after you covered your short, share price recovered.
While short, you would pay out any dividends if you were short on the ex-dividend date. You would also pay a borrow fee which is very small on large caps (0.25% per annum) and can be very high for high beta issues (100s of percent). You'd also have bid/ask slippage and additional commissions, if you're still paying them. In the grand scheme of things, if the borrow rate is low, all of these debits are small potatoes compared to the potential savings of a successful hedge.
A fly in the ointment is that is your holding period of the substantially identical property is less than one year, your holding period is zeroed out and does not resume until the short position is closed. The holding period is not affected if you are already holding the stock long-term.
In addition, the holding period resets (see the example about Baker Company at the bottom of page 55 in IRS Pub 550).
Also see constructive sales where a taxable capital gain is triggered if the long position has appreciated.