Short Sell Against the Box

AAA

DEFINITION of 'Short Sell Against the Box'

The act of short selling securities that you already own. This results in a neutral position where your gains in a stock are equal to the losses. For example, if you own 100 shares of ABC and you tell your broker to sell short 100 shares of ABC, you have shorted against the box. An alternative to short selling against the box is to buy a put on your stock. This may or may not be less expensive than doing the short sale.

Also known as "shorting against the box".

INVESTOPEDIA EXPLAINS 'Short Sell Against the Box'

Before 1997, the sole rationale for shorting against the box was to delay a taxable event. According to tax laws that preceded 1997, owning both long and short positions in a stock meant that any papers gains from the long position would be removed temporarily due to the offsetting short position. All in all, the net effect of both positions is zero, meaning that no taxes need to be paid.

Let's say that you have a big gain on some shares of ABC. You think that ABC has reached its peak and you want to sell. However, the tax on the capital gain may leave you under-withheld for the year and subject to penalties. Perhaps the next year you expect to make a lot less money, putting you in a lower bracket and causing you to want to take the gain at that time. However, the Taxpayer Relief Act of 1997 (TRA97) no longer allows short selling against the box as a valid tax deferral practice. Under TRA97, capital gains or losses incurred from short selling against the box are not deferred. The tax implication is that any related capital gains taxes will be owed in the current year.

RELATED TERMS
  1. Short Selling

    The sale of a security that is not owned by the seller, or that ...
  2. Naked Shorting

    The illegal practice of short selling shares that have not been ...
  3. Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with ...
  4. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  5. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  6. Guideline Premium And Corridor ...

    A test used to determine whether an insurance product can be ...
Related Articles
  1. Active Trading Fundamentals

    Short Selling Tutorial

    Want to profit on declining stocks? This trading strategy does just that.
  2. Mutual Funds & ETFs

    How To Start A Hedge Fund In Canada

    Would-be hedge fund managers in Canada need to understand the laws and regulations that must be followed in order to start a fund in the country.
  3. Technical Indicators

    Use Volume And Emotion To Tackle Topping Patterns

    Selling short in a topping pattern offers an advantageous reward-to-risk profile, but it can be hard to find good entry prices.
  4. Active Trading Fundamentals

    Where And How To Trade Energy Stocks

    Energy futures set a high bar to entry for individual traders and investors, redirecting exposure into sector equities and exchange-traded funds.
  5. Trading Strategies

    Rules and Strategies For Profitable Short Selling

    Short sales work well in bull and bear markets but strict entry and risk management rules are required to overcome the threat of short squeezes.
  6. Mutual Funds & ETFs

    Short Russia with Direxion's Daily Russia Bear 3X

    Looking to short Russia? Check out the Direxion Daily Russia Bear 3X ETF.
  7. Mutual Funds & ETFs

    Are These the Top Inverse ETFs of 2015?

    Short shy? Here's a list of top inverse ETFs to help you profit from a decline in the value of an index or group of stocks.
  8. Mutual Funds & ETFs

    Will the Natural Gas ETF KOLD Stay Hot?

    Proshares UltraShort Bloomberg Natural Gas ETF isn't an investment for the faint of heart.
  9. Options & Futures

    How To Protect A Short Position With Options

    Short selling can be a risky endeavor, but the inherent risk of a short position can be mitigated significantly through the use of options.
  10. Mutual Funds & ETFs

    A Guide to Using Inverse ETFs for Diversification

    A look at how inverse ETFs can help investors diversify their portfolios.

You May Also Like

Hot Definitions
  1. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  2. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  3. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  4. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  5. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  6. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
Trading Center