Short selling and taxes

learner2007

learner2007

Someone I know in the U.S. often needs a little hand holding due
to insufficient information he has obtained.

Today he emailed the following to me:

[AS FOR SHORTING, I CAN'T SHORT STOCKS. THE ACCOUNTS I HAVE ARE DEFERRED TAX ACCOUNTS , I ONLY PAY TAX WHEN I TAKE THE MONEY OUT OF THE ACCOUNT. IT WAS SET UP AS A RETIREMENT ACCOUNT AND THE GOVERNMENT PREVENTS PEOPLE WITH THESE ACCOUNTS TO TAKE BIG RISKS IN THE MARKET. ]

I do not live in the U.S. and know nothing of U.S. tax laws.
My question is, does it sound as though he has the correct information? And if so, would he also be unable to short an ETF
that mirrors the S&P500 (SSO?) for instance for the same reasons?

I know that tax questions can be very difficult to answer even with complete information at hand. I'm just trying to help this guy
get pointed in the right direction should he be misinformed.

Thank you very much for any information you may so kind as to provide.
 
The answer is totally explicit.

You may not short stock in a tax deferred account per IRS rules.

You *can* short options as long as they're part of a hedged option spread.

You can short futures.

As far as options and futures are concerned, it's up to the broker if *they* let you do it or not. Some brokers make you jump through some hoops to get your account approved to do these things. Some simply don't allow it at all.

I have an IRA at IB where I do lots of option spreads. TOS and OX also allow option spreads in IRAs.

If you want to be short some market, say the SP 500, Dow or Naz, there are plenty of inverse ETFs that let you do that to avoid shorting.
 
Quote from stevegee58:

The answer is totally explicit.

You may not short stock in a tax deferred account per IRS rules.

You *can* short options as long as they're part of a hedged option spread.

You can short futures.

As far as options and futures are concerned, it's up to the broker if *they* let you do it or not. Some brokers make you jump through some hoops to get your account approved to do these things. Some simply don't allow it at all.

I have an IRA at IB where I do lots of option spreads. TOS and OX also allow option spreads in IRAs.

If you want to be short some market, say the SP 500, Dow or Naz, there are plenty of inverse ETFs that let you do that to avoid shorting.
More...


>stevegee58

Thank you very much for your reply.

So he would be able to sell ETF'S with his tax deferred account
without breaking IRS rules? I'm sure that will be good news to him.

Thank you again.
 
Quote from learner2007:

>stevegee58

Thank you very much for your reply.

So he would be able to sell ETF'S with his tax deferred account
without breaking IRS rules? I'm sure that will be good news to him.

Thank you again.
More...

No, he can't sell short anything in his IRA - no stock, no ETFs. If he wants to be "short" the SP500 he needs to be *long* an inverse ETF for SP500 such as SDS. Or he could put on bearish option spreads, but that's a whole separate discussion.
 
Quote from stevegee58:

No, he can't sell short anything in his IRA - no stock, no ETFs. If he wants to be "short" the SP500 he needs to be *long* an inverse ETF for SP500 such as SDS. Or he could put on bearish option spreads, but that's a whole separate discussion.
More...

>stevegee58

Oh, sorry I misunderstood. I trade only futures and am not that familiar with ETF's. They have ETF's where I am but no inverse ETF's. And to be honest I don't know how an inverse ETF differs from a normal ETF. Anyway, as he's not ready for option spreads etc. I guess he's out of luck.

My reason for looking into this was that he has always traded on the long side and during downtrends sits on the sidelines or goes against the trend.

Thanks again.

Ah, sorry one more question. Could he buy index put options on the S&P500 within IRS rules if his broker allowed it?
 
>stevegee58

I just Googled and learned what an inverse ETF is. That sounds perfect for him. We don't have such here in Japan.

Thank you very much for informing me about inverse ETF's.
 
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