Key takeaway

  • Short sales (selling borrowed securities) and buybacks (covering the short) produce capital gains or losses that you must report on Form 8949 and Schedule D. Brokers usually provide a Form 1099‑B showing proceeds and cost-to-cover. (See IRS Publication 550 and About Schedule D.)

How reporting works

  • Tax treatment: Gains or losses from short sales are capital gains/losses. The IRS treats short-sale results as short‑term, regardless of how long the short position was open; report them on Form 8949 and then on Schedule D (Form 1040). (IRS Publication 550: Investment Income and Expenses.)
  • Broker reporting: Your broker will generally issue a Form 1099‑B with the sale date and proceeds, and may report basis and adjustment codes; transfer those entries to Form 8949 and check the appropriate box.

Step‑by‑step reporting checklist

  1. Gather records: Form 1099‑B(s), trade confirmations (dates, quantities, prices), margin interest, and payments in lieu of dividends.
  2. Reconcile totals: Match each 1099‑B sale to your trade confirmations. Note any broker-reported basis or adjustment codes.
  3. Complete Form 8949: List each short sale closing transaction. If the broker reported basis to the IRS, check the appropriate box; otherwise include basis and use adjustment columns for wash-sale disallowances or fees.
  4. Summarize on Schedule D: Carry totals from Form 8949 to Schedule D to compute net short‑term and long‑term capital gain/loss.
  5. Apply loss limits and carryovers: If net losses exceed gains, you can deduct up to $3,000 ($1,500 MFS) of net capital loss against ordinary income and carry remaining losses forward.

Real‑world example

  • You short 100 shares at $50 = $5,000 proceeds. Later you buy to cover at $40 = $4,000 cost. Your $1,000 gain is a short‑term capital gain and should appear on Form 8949 and Schedule D.
  • If you buy to cover at $60 = $6,000 cost, you realize a $1,000 short‑term capital loss; it can offset other capital gains or be deducted up to the $3,000 limit.

Special rules and common pitfalls

  • Always‑short‑term result: The IRS generally treats gains/losses on short sales as short‑term (see Pub. 550). That affects tax rates and how losses offset other income.
  • Payments in lieu of dividends and interest: If the lender of the shares receives dividends, you may owe a payment in lieu; your broker typically reports these amounts and they affect your tax picture. Keep records of margin interest and fees (may be deductible as investment interest subject to limits). (IRS Publication 550)
  • Wash sale complexity: The wash sale rule can disallow a loss if you acquire a substantially identical security within 30 days before or after a loss. Short-sale activity can trigger wash-sale adjustments—especially if you enter offsetting long positions or use options. Use Form 8949 adjustment codes to reflect disallowed losses and consult a tax pro for complex cases. (IRS Publication 550 and Form 8949 instructions)

Forms and documentation

  • Form 1099‑B: Issued by brokers; shows proceeds and often basis and adjustment codes.
  • Form 8949: Report each transaction; use adjustment column(s) for wash sales or fee adjustments.
  • Schedule D (Form 1040): Summarize capital gains and losses and compute taxable amounts.
  • Keep trade confirmations, margin statements, and records of payments in lieu, fees, and dividends for at least three years (longer if audit issues).

Practical tips from practice

  • In my practice I advise clients to download and store broker 1099‑B files and trade confirmations each year; mismatches between broker basis and your records are the most common source of IRS notices.
  • Run tax software reports that import 1099‑B data to reduce manual entry errors; still review each imported trade for wash‑sale flags and adjustments.
  • Consider tax‑lot tracking: If you have multiple short positions across dates, accurate lot-level records avoid reporting mistakes.

Interlinks and further reading

  • For a concise primer on short‑sale mechanics, see our Short Sale glossary entry: Short Sale.
  • For strategies that affect how and when to realize gains or losses, see Capital Gains Tax: Strategies to Minimize It.

Common mistakes to avoid

  • Not reporting buybacks or only reporting when you think a profit occurred—every closing of a short position must be reported.
  • Ignoring broker 1099‑B codes and failing to include required adjustments on Form 8949.
  • Misapplying wash‑sale rules—if you rebuy substantially identical securities near the loss date, your loss may be disallowed or adjusted.

When to get professional help

  • Complex trades (synthetic positions, options used to replicate ownership, frequent trading with many wash‑sale adjustments) and trader tax status questions warrant a tax professional. In complex short‑sale patterns, I regularly see clients benefit from an accountant who can reconstruct lot-level basis and apply correct Form 8949 adjustments.

Authoritative sources

Professional disclaimer

This article is educational and does not replace personalized tax advice. For transaction‑specific guidance, consult a qualified tax professional or CPA familiar with short‑sale reporting and your full tax picture.