Question

On March 5, 2018, Lauren thought ELM stock was overvalued. Convinced the price would decline, she borrowed 100 shares of ELM from her broker at $40 per share. She then immediately sold the shares in a short sale. On July 27, 2018, the price of ELM had declined to $31 per share. Lauren purchased 100 shares at this price on the open market and then delivered them to her broker to close the short sale. How does Lauren report this transaction on her tax return?

$3,100 capital gain.

$900 capital gain.

$900 capital loss.

$3,100 capital loss.

Answer 1

Answer:- $900 Capital gain

Cost of 100 shares of on March 5,2018 = $4,000 ($40 * 100)

Sale proceeds of these 100 shares = $4000

Cost of 100 shares bought on July 27, 2018 = $3100 ($31 *100)

Lauren has purchased from broker and sold for $4000 on March 5, 2018. But on July 27,2018, she purchased the same number of shares for lesser cost i.e., for $3100($31 * 100) and settled the debt with the broker. She realized a gain of $900 ( $4000 - $3100).

Therefore, Lauren has to report this transaction in her tax return as $900 Capital gain.