Replies to post #135292 on Sulja Bros. Building Supplies, Ltd (SLJB)

[eelfland]

Normally, yes. You don't want to incur a big capital gain, but you think your stock is overpriced and are afraid that it's going to take a dump, so you sell "against the box" and still own your shares. I see no problem with that.

[eelfland]

You could buy puts and/or sell calls against your stock, if they're available, and it would amount to much the same thing, but to temporarily neutralize your position, selling short "against the box" is a handy tool to have in the shed. The only problems are that you have to pay interest on the value of the borrowed shares, and you have to reimburse any dividends that accrue to the shorted shares. But the dividends are a wash, since you own offsetting shares. Still, it costs money to be short, in any form, and is not usually a good idea, unless there are special circumstances, and it's only short-term.

[nsomniyak]

yes - shorting against the box is used for tax purposes. If you have a gain that you want to lock in but defer the actual sale of, so as to change the timing of the taxable event, you go short an equal number of shares, then close out the short (generally in the next tax year) by delivering your original shares.

In other words, say I have a sizeable gain on 1000 shares of ABCD as of December 15 this year. I want to lock in that gain, but don't want the taxable event in this year. I contact my broker and go short against the box 1000 shares of ABCD. In January, I close out the short position by delivering my shares. This avoids a taxable event in 2006. Instead of paying taxes on that gain 4 months later than 12/15/06 (2006 taxes due April 2007), I pay them 16 months lare, in April 2008.

To some degree, this can also be used to lock in a gain that is short term but defer the actual sale until the position is a year old, and long term, though you have to spread the two transactions out enough to avoid a wash sale.