Complex Stock Transaction

[erchess]

This is an actual case but I have disguised the investor and the stock.

Mr. Gotbucks shorted 1000 shares of Becky's Bakery (CAKE) on 11/15/06 when the stock was selling for $31.43 per share.

At some point while Gotbucks was short on CAKE, Becky and her board of directors split the stock so that Gotbucks owed his broker 1500 shares.

The position remained open at the end of 06 so there was nothing about the event on his 06 return.

On 6/22/07 Gotbucks decided to cover his short. The broker fulfilled the order in two steps - 863 shares for 16389.73 and 637 shares for 12071.15.

Now it is time to settle things with the IRS. I believe that Gotrocks effectively shorted Cake at $3143/1500 or 2.095 per share. I believe that he should show two transactions on his D because the broker covered in two stages. I believe that for the 863 shares with basis of $16389.73 he got 1807.95 and for the 637 shares covered for $12071.15 he got 1334.515.

Am I missing anything?

[Snaggletooth]

No Good on Short Sales

as I understand it, Short Sales are when you sell shares before you buy.

If transacted at the market value, he actually SOLD the shares at $31.43 for a total of $31430.00. Then when he covered, he then BOUGHT at a total of $28,430.88. He thus has a taxable gain of $2969.12.

Perhaps what has convoluted this is the 3:2 split. For historical purposes, the $31.43 price becomes $20.9533, which is the original price of $31,430.00 divided by 1500 (the new number of shares).

I would feel a lot better if someone like Sea-Tax would comment on this. This is right up his alley.

[Anarchrist]

Snaggletooth's correct - $2969 gain. Fairly straightforward. Sold it in 2006 for $31430.00. Purchased it in 2007 for $16389.73 + $12071.15. Doesn't have to be reported as two transactions on Sch D just because the lot sold in two transactions.