Understanding Synthetic Dispositions – Short Sale of Similar or Identical Property

We continue our Synthetic Dispositions series this week with a look at the short sale of similar or identical property.

Example: Synthetic Disposition –
Short Sale of Similar or Identical Property

Issue:  Gloria owns 10,000 shares of ABC Corp. Her adjusted cost base is $6/share and the shares are currently worth $9/share. She arranges with her broker to borrow 5,000 shares of ABC Corp and sells them at $9/share. When her broker requires her to return the borrowed shares in 2014, she provided 5,000 of the shares she owns. How is this transaction taxed?

Answer: If the arrangement was made before budget day (March 21, 2013), Gloria would have no income tax consequences in 2013. In 2014, she would report a capital gain of ($9/share - $6/share) x 5,000 shares = $15,000.

If the arrangement was made after budget day then Gloria would be deemed to have disposed of 5,000 of the shares she owned at $9/share and she would therefore report the $15,000 capital gain in 2013.

Excerpted from EverGreen Explanatory Notes. ©Knowledge Bureau. All rights reserved.

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