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U.S. Tax Code Rewards Naked Short Sellers |
Are there negative tax consequences associated with naked short selling to the U.S. Treasury?
There are ASTRONOMICAL negative tax consequences to both our Local, State, and Federal Government in several
ways. The first being that on a naked short sale, the person who has engaged the naked short sale only has to pay
taxes when or if they ever "cover" that security in the open market. As stated by the SEC, it is often not the intention of
these naked short sellers to EVER cover their naked short positions. If companies declare bankruptcy, the naked
short sellers never cover their positions and never pay taxes on the money they pulled out on a mark to market basis -
tax free money. This only encourages naked short selling and "helping" companies go BK.
In addition, the ones losing money on their long positions will declare losses and write off these losses on their tax
returns, reducing government income even more - a double whammy to the U.S. Treasury.
When a company is a victim of such abuses they often can no longer raise funds and are forced to close up shop
thereby laying people off. Some of those same people will be forced to file unemployment claims and will not longer be
part of the working class paying taxes, but instead they will be receiving benefits from our Government.
Also, the company itself, if it were not destroyed, could have been able to grow and become profitable and yet with
naked shorting, those taxes that the company could have paid to our Government will never be realized.
So as well as the naked short draining equity from the common shareholders, they are reducing government revenue
collection by destroying companies who could have continued to employ tax paying workers, paid corporate income
tax and provided investors with capital gains which would have been taxed as capital gains. Instead, these revenue
sources are compromised.
In addition, broker-dealers have an incentive to falsely declare "paid in lieu" dividends or PIL, as being real dividends
paid by the corporation. When in fact the money originated from the broker, not the corporation. This is an important
point because the brokers or customers pay a lower tax rate if the income is declared as coming from corporate
dividends rather than as PIL. One solution would be for the IRS to compare all dividends declared by tax payers on a
particular security on the tax returns with what the issuer paid out. They should match perfectly. But we strongly
suspect that such a comparison will show large discrepancy to the detriment of the U.S. Treasury. In other words, the
IRS would probably find that more dividend income is declared that the issuer paid out. This is only possible via broker-
dealer fraud and it is a fraud on the U.S. Treasury.
The obvious is to change the tax code so that short selling of all kinds do not enjoy tax advantages over long
investors. At the very least, money earned by short selling should be taxed the moment it is received on a mark to
market basis by the short seller or used as collateral, as short term capital gains - even if the short position remains
open. In addition, the IRS must audit or somehow ensure that broker-dealers can not falsely label PIL as Dividends.
The solution to that problem exceeds our expertise, but surely the IRS or more savvy politicians can think of
something.
There are ASTRONOMICAL negative tax consequences to both our Local, State, and Federal Government in several
ways. The first being that on a naked short sale, the person who has engaged the naked short sale only has to pay
taxes when or if they ever "cover" that security in the open market. As stated by the SEC, it is often not the intention of
these naked short sellers to EVER cover their naked short positions. If companies declare bankruptcy, the naked
short sellers never cover their positions and never pay taxes on the money they pulled out on a mark to market basis -
tax free money. This only encourages naked short selling and "helping" companies go BK.
In addition, the ones losing money on their long positions will declare losses and write off these losses on their tax
returns, reducing government income even more - a double whammy to the U.S. Treasury.
- How about local government entities?
When a company is a victim of such abuses they often can no longer raise funds and are forced to close up shop
thereby laying people off. Some of those same people will be forced to file unemployment claims and will not longer be
part of the working class paying taxes, but instead they will be receiving benefits from our Government.
Also, the company itself, if it were not destroyed, could have been able to grow and become profitable and yet with
naked shorting, those taxes that the company could have paid to our Government will never be realized.
So as well as the naked short draining equity from the common shareholders, they are reducing government revenue
collection by destroying companies who could have continued to employ tax paying workers, paid corporate income
tax and provided investors with capital gains which would have been taxed as capital gains. Instead, these revenue
sources are compromised.
- Additional Possible Tax Consequences - Dividends
In addition, broker-dealers have an incentive to falsely declare "paid in lieu" dividends or PIL, as being real dividends
paid by the corporation. When in fact the money originated from the broker, not the corporation. This is an important
point because the brokers or customers pay a lower tax rate if the income is declared as coming from corporate
dividends rather than as PIL. One solution would be for the IRS to compare all dividends declared by tax payers on a
particular security on the tax returns with what the issuer paid out. They should match perfectly. But we strongly
suspect that such a comparison will show large discrepancy to the detriment of the U.S. Treasury. In other words, the
IRS would probably find that more dividend income is declared that the issuer paid out. This is only possible via broker-
dealer fraud and it is a fraud on the U.S. Treasury.
- Solution
The obvious is to change the tax code so that short selling of all kinds do not enjoy tax advantages over long
investors. At the very least, money earned by short selling should be taxed the moment it is received on a mark to
market basis by the short seller or used as collateral, as short term capital gains - even if the short position remains
open. In addition, the IRS must audit or somehow ensure that broker-dealers can not falsely label PIL as Dividends.
The solution to that problem exceeds our expertise, but surely the IRS or more savvy politicians can think of
something.