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I know how mergers (typically) work when you're long a company, you simply get shares in the merged company equal to your previous market value. But what happens if you hold a short position?

The reason I ask is because this scenario recently happened to me, and I'm seeing a confusing closed position on my tax form. It looks like the old position is treated as a realized gain/loss before converting to the new position?

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  • So just to be clear, you were short the pre-M company and you are still short, without any discussions or decisions on your part, the post-M company? Just so I understand, what sort of merger was it - was it a qualified reorg (so-called "tax-free merger") or was it a taxable sale? – NL7 Apr 2 '14 at 20:36
  • The stocks in question were XTXI and ENLC. I was short XTXI, and then ended up with an even money short position in ENLC after the merger. The cost-basis my XTXI position closed out at was very low, much lower than its last ticked price ~$37 – JLewkovich Apr 2 '14 at 21:44
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I don't have anything definitive, but in general positions in a company are not affected materially by what is called a corporate action. "Corp Actions" can really be anything that affects the details of a stock. Common examples are a ticker change, or exchange change, IPO (ie a new ticker), doing a split, or merging with another ticker.

All of these events do not change the total value of people's positions. If a stock splits, you might have more shares, but they are worth less per share. A merger is quite similar to a split. The old company's stock is converted two the new companies stock at some ratio (ie 10 shares become 1 share) and then converted 1-to-1 to the new symbol.

Shorting a stock that splits is no different. You shorted 10 shares, but after the split those are now 100 shares, when you exit the position you have to deliver back 100 "new" shares, though dollar-for-dollar they are the same total value.

I don't see why a merger would affect your short position. The only difference is you are now shorting a different company, so when you exit the position you'll have to deliver shares of the new company back to the brokerage where you "borrowed" the shares you shorted.

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