7535 / How is a short sale taxed if the seller dies shortly after making the short sale and the estate or a trust "closes" the sale?

It was determined (under a ruling pre-dating the constructive sales rules of IRC Section 1259) that where a trust established by a seller closed a short sale after the death of the seller with stock it held for the seller’s benefit, the basis of such stock generally would be its fair market value either on the date of the seller’s death or on an alternative valuation date determined under IRC Section 2032.²

For short sales that are not subject to the constructive sales rules of IRC Section 1259 (see Q 7525), the taxable event of the short sale occurred when the estate or trust “closed” the sale.³ Thus, any gain recognized on the short sale would not constitute “income in respect of a decedent” (see Q 747). Special rules may apply to decedents who held an open short sale position within three years of death (see Q 7621).