Tax Facts

7529 / May an investor deduct the premium paid to borrow stock in connection with a short sale?

The premium paid by an investor to borrow the stock delivered to the buyer in a short sale is an expense incurred for the production of income.1 But the amount is generally treated as interest expense (subject to the limitation on the deduction of investment interest).2 As a result, a short seller may find that only a portion (or none) of the premium is deductible for income tax purposes.3 See Q 8040 regarding the deduction of investment interest.


Furthermore, if the proceeds of a short sale are used to purchase or carry tax-exempt obligations, the amount of the premium is treated as interest for purposes of the general rule that prohibits the deduction of interest expense incurred or continued to purchase or carry tax-exempt obligations. (But this does not apply if the short seller provided cash as collateral for the short sale and does not receive material earnings on such cash.)4 See Q 8044 and Q 8050 for an explanation of this rule.

If the proceeds of a short sale are used to purchase or carry short-term obligations or market discount bonds, an otherwise allowable deduction of the short sale premium may have to be deferred under the rules discussed in Q 8045 and Q 8046.(A short-term obligation is one which has a fixed maturity date not more than one year from the date of issue.)5





1.   Rev. Rul. 72-521, 1972-2 CB 128.

2.   It is not, however, a miscellaneous itemized deduction subject to the limitations of IRC Section 67. IRC § 67(b)(8).

3.   IRC § 163(d).

4.   IRC §§ 265(a)(2), 265(a)(5).

5.   IRC §§ 1277, 1282, 1283.


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