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

In the given scenario, Lauren would report this transaction as $900 capital gain.

Explanation - during March 2018, Lauren borrowed 100 shares from her broker and sold them in market @ $40 per share which is a short sale. However, during July 2018 when the price declined to $31 per share, Lauren purchased the shares from open market @ $31 per share and returned to her broker to close the short sale. Hence, these 2 transactions would result in a net gain of $9 per share i.e, Sale price - Purchase price = 40 - 31 = 9 per share.

Total gain will be $9 per share x 100 shares = $900 total gain which Lauren would report as Capital gain in her tax return.