I have a short position that I have a significant profit on. Is it possible to donate this to charity the same way I might donate "appreciated stock", so as to avoid the short-term capital gains?
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3could your edit the tags and add country. Tax rules vary from country to country– DheerNov 3, 2015 at 16:20
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5I'm not sure enough to post an answer, but I have to believe the answer is "no" because you don't "own" a short position. It is essentially a loan. When you cover the short position, the tax is determined by how long you held the stock that you used to close the short position. (Often 0 days because you "buy to cover" specifically.) I'm assuming this is US because "short-term capital gains" sounds specific to the US tax code - I agree with Dheer though that it would be better for you to label the question explicitly.– user32479Nov 3, 2015 at 17:11
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1I agree with @Brick, and to state it another way, think of what sort of asset you possess. When you sell long, you give someone some money, and they give some stock in return, so the asset you possess is the stock, which you can donate, sell, gift, etc. When you sell short, you give someone some stock (that you borrowed) and they give you some money in return, so the asset you possess is the money, which you can donate, gift, buy something else with, etc. So you could donate the money you get selling short, but you'll still owe the shares you borrowed, so the position is still open.– blmNov 3, 2015 at 20:18
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2Why are you so worried about paying taxes on any profits you make from trading?– user9822Nov 5, 2015 at 20:22
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2 Answers
No. There is no asset associated with your short position, so there's nothing to gift. The short position in the stock is purely a liability. When you note that you have a profit in the position, what you mean is that the cash you made when you shorted the stock is more than enough to cover the short position. The only asset in this picture, then, is the cash you made when you entered the short position.
With a short position you make your money (profit) when you buy the stocks back to close the position at a lower price than what you bought them at. As short selling is classed as speculation and not investing and you at no time own any actual assets, you cannot donate any short possition to charity.
If you did want to avoid paying tax on the profits you could donate the proceeds of the profits after closing the position and thus get a tax deduction equal to the profits you made.
But that raises a new and more important question, why are you trading in the first place if you are afraid to make profits in case you have to pay tax on those profits?
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Are you sure about the tax consequences? I'm pretty sure it is a capital gain, with the term determined by how long you hold the shares you buy to cover the short, which will be less than a day, so it will be a short-term capital gain. While they're taxed at the same rate as ordinary income, they can be used to offset (or be offset by) other capital gains, which they couldn't be if ordinary income (all assuming US).– blmNov 3, 2015 at 21:18