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Short selling - stock borrow fee

Practical Issues
strophe
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Short selling - stock borrow fee

#169150

Postby strophe » September 26th, 2018, 1:12 pm

When short selling, is the borrowing fee an allowable expense for capital gains tax purposes?

GoSeigen
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Re: Short selling - stock borrow fee

#169637

Postby GoSeigen » September 27th, 2018, 9:21 pm

strophe wrote:When short selling, is the borrowing fee an allowable expense for capital gains tax purposes?


Strikes me that this is impossible to answer without knowing significantly more:
-Basic info about the contract.
-How is the borrowing done?
-What is the structure and nature of the fee?
-What is the business/tax status of the borrower? Corporate/private/fund??

etc.

Could you be a bit more specific?

GS

strophe
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Re: Short selling - stock borrow fee

#169677

Postby strophe » September 27th, 2018, 11:58 pm

Hi GS,

These are ordinary shares in a US company, sold using Interactive Brokers.

They charge me a borrow fee which accrues daily as long as the position is open. The rate changes but is currently sitting around 8% (annually) for this particular share.

I'm just a (small) private investor, and while I don't normally short because of the risk involved, on this occasion it was useful to hedge another position (a sort of merger arbitrage).

It feels like this ought to be a common question with a fairly simple Yes/No answer... but maybe not?

pochisoldi
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Re: Short selling - stock borrow fee

#169687

Postby pochisoldi » September 28th, 2018, 1:09 am

Sounds like an interest/financing type charge to me - not allowable for CGT purposes.

strophe
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Re: Short selling - stock borrow fee

#169902

Postby strophe » September 28th, 2018, 4:50 pm

Yes I suppose you're referring to this - interest payments are specifically not allowed.
https://www.gov.uk/hmrc-internal-manual ... al/cg15284

But I'm not sure if this fee really should be classed as an interest payment. In the US at least, it looks like those fees are not treated as interest but as “fees for the temporary use of property”.

It seems a bit unfair if it isn't deductible, as it's pretty essential - there's no way to open a short position without paying a borrow fee. Perhaps there's an argument to be made that it falls under "Acquisition and disposal costs" (TCGA92/S38)
https://www.legislation.gov.uk/ukpga/19 ... 38/enacted

I'd be interested to hear any other thoughts!

strophe
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Re: Short selling - stock borrow fee

#169908

Postby strophe » September 28th, 2018, 5:09 pm

Here's the US tax position
https://greentradertax.com/short-sellin ... rrow-fees/

The IRS has ruled that short sales do not give rise to an interest-bearing indebtedness (Revenue Ruling 95-8, 1995-1 CB 107). Rather, the short sale borrower has a liability under state law to return the borrowed stock and pay fees, but this is not interest expense.


The other interesting question is how dividends you PAY while borrowing the stock are treated. It all gets quite messy...


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