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TITLE 26-INTERNAL REVENUE CODE § 1233. Gains and losses from short sales (a) Capital assets For purposes of this subtitle, gain or loss from the short sale of property shall be consid- ered as gain or loss from the sale or exchange of a capital asset to the extent that the proper- ty, including a commodity future, used to close the short sale constitutes a capital asset in the hands of the taxpayer. (b) Short-term gains and holding periods If gain or loss from a short sale is considered as gain or loss from the sale or exchange of a capital asset under subsection (a) and if on the date of such short sale substantially identical property has been held by the taxpayer for not more than 9 months (determined without regard to the effect, under paragraph (2) of this subsection, of such short sale on the hold- ing period), or if substantially identical proper- ty is acquired by the taxpayer after such short sale and on or before the date of the closing thereof- (1) any gain on the closing of such short sale shall be considered as a gain on the sale or exchange of a capital asset held for not more than 9 months (notwithstanding the period of time any property used to close such short sale has been held); and (2) the holding period of such substantially identical property shall be considered to begin (notwithstanding section 1223, relating to the holding period of property) on the date of the closing of the short sale, or on the date of a sale, gift, or other disposition of such property, whichever date occurs first. This paragraph shall apply to such substantially identical property in the order of the dates of the acquisition of such property, but only to so much of such property as does not exceed the quantity sold short. For purposes of this subsection, the acquisition of an option to sell property at a fixed price shall be considered as a short sale, and the ex- ercise or failure to exercise such option shall be considered as a closing of such short sale. (c) Certain options to sell Subsection (b) shall not include an option to sell property at a fixed price acquired on the same day on which the property identified as intended to be used in exercising such option is acquired and which, if exercised, is exercised through the sale of the property so identified. If the option is not exercised, the cost of the option shall be added to the basis of the proper- ty with which the option is identified. This sub- section shall apply only to options acquired after August 16, 1954. (d) Long-term losses If on the date of such short sale substantially identical property has been held by the taxpay- er for more than 9 months, any loss on the clos- ing of such short sale shall be considered as a loss on the sale or exchange of a capital asset held for more than 9 months (notwithstanding the period of time any property used to close such short sale has been held, and notwith- standing section 1234). (e) Rules for application of section (1) Subsection (b)(1) or (d) shall not apply to the gain or loss, respectively, on any quan. tity of property used to close such short sale which is in excess of the quantity of the sub- stantially identical property referred to in the applicable subsection. (2) For purposes of subsections (b) and (d)- (A) the term "property" includes only stocks and securities (including stocks and securities dealt with on a "when issued" basis), and commodity futures, which are capital assets in the hands of the taxpayer; (B) in the case of futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange, a commodity future requiring delivery in 1 calendar month shall not be considered as property substantially identical to another commodity future requiring delivery in a different calendar month; and (C) in the case of a short sale of property by an individual, the term "taxpayer", in the application of this subsection and sub- sections (b) and (d), shall be read as "tax- payer or his spouse"; but an individual who is legally separated from the taxpayer under a decree of divorce or of separate maintenance shall not be considered as the spouse of the taxpayer. (3) Where the taxpayer enters into 2 com- modity futures transactions on the same day, one requiring delivery by him in one market and the other requiring delivery to him of the same (or substantially identical) commodity in the same calendar month in a different market, and the taxpayer subsequently closes both such transactions on the same day, sub- sections (b) and (d) shall have no application to so much of the commodity involved in either such transaction as does not exceed in quantity the commodity involved in the other. (4)(A) In the case of a taxpayer who is a dealer in securities (within the meaning of section 1236)- (I) if, on the date of a short sale of stock, substantially identical property which is a capital asset in the hands of the taxpayer has been held for not more than 9 months, and (ii) if such short sale is closed more than 20 days after the date on which it was made. subsection (b)(2) shall apply in respect of the holding period of such substantially identical property. (B) For purposes of subparagraph (A)- (I) the last sentence of subsection (b) ap- plies; and (ii) the term "stock" means any share or certificate of stock in a corporation, any bond or other evidence of indebtedness which is convertible into any such share or certificate, or any evidence of an interest in, or right to subscribe to or purchase, any of the foregoing. (f) Arbitrage operations in securities In the case of a short sale which had been en- tered in to as an arbitrage operation, to which sale the rule of subsection (b)(2) would apply § 1233 Page 687