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Krispy Kreme Doughnuts, Inc. Message Board

  • momo_maestro momo_maestro Feb 9, 2005 3:39 PM Flag

    what happens to short positions

    when a company goes into chapter 11? how can you cash out?

    thanks,

    i'm thinking of shorting here. yeah. a little late, but the best times to short are when you know a company is completely done. kkd = done

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    • Good question. However from a practical standpoint it matters little. The sale is short term and the only thing that matters is defining the year.

    • "At the time the stock becomes worthless triggers your tax liability. "

      Agreed... but now my question is, who/when/how is it determined (precise date) that the stock has become worthless?

    • Bob-Your post clearly states the tax situation regarding short sales. In a bankruptcy it usually takes several years before the company emerges. No tax will be due unless you cover. At the time the stock becomes worthless triggers your tax liability. It will be treated as a short term sale as you pointed out. If KKD is headed for BK as many shorts believe there is no reason to expect a short squeeze to develop.

    • Di vur si fi,

      You can do it in the same account as long as the short transaction precedes the long transaction. Keep both the long and short position open. Unfortunately, I'm not sure KKD will be around for a year once the stock price geets low enough to make it worthwhile.

      Bob

    • If you buy the security in another account, isn't that a constructive "buy", i.e. you are no longer at risk, the position is closed and you have a taxable event.

      On the other hand, couldn't you do the following to get the long-term cap gain:

      Buy kkd in a account which you don't "control" according to the irs, i.e. a trust account or your fiance's account or your parent's account, so that when you eventually get (marry into, trust matures, inherit, etc...) the securities to offset the short you can then qualify for long-term gain (assuming you've held the LONG position for a year).

    • If you go to IRS.gov and select Publication 550, on page 55 the rule is explained. Hope this helps.

      Bob

    • I think your wrong on long-term capital gain. I think all short sale profits and losses are short-term. In your scenario the only long-term gain would be if the stock bought long would go up in price during the year holding period. It would be my contention though that the short sale would have been effectively closed out if you go long. Just as if you short a stock when you have long profits, the IRS calls that then a constructive sale. I don't see why the mirror of that wouldn't be IRS policy as well. Have any rulings, regs to back up your interpretation.

    • Carl,

      Regarding your put question,I'm not a lawyer, just a CPA and know a good deal about taxes which is how I got on this thread with Delaurenthis. Having said that I think there is a lot of misinformation on this Board. I've seen some imply that short sales have to be covered sometime and that is not true. If a stock is ultimately worthless, the short is never covered but taxable when the stock is worthless. Some have confused bankruptcy and worthlessness. Filing for bankruptcy does not mean the stock is worthless and in fact some companies come out of bankruptcy with their original shareholders still participating as such. It was for this reason that I suggested to Delaurenthis that he may want to buy some KKD when the price gets low enough with the hope that the company's stock survives for a year so he could obtain long term capital gain treatment by covering his short position with stock held for a year.

      The other misinformation on this Board seems to be that put options expire worthless if the stock is worthless. Not true. If you go to CBOE.com, and click on the "learning center", you will see a section that allows you to submit questions and the CBOE selects a question a week and publishes a response. If you page through the archives, on 8/5/02 they responded to a bankruptcy/worthless security question and explain how settlement is made. Good luck.

      Bob

    • IMO Those holding a short position in BK will be in a position whereby they will not have to pay taxes on their gain if they refrain from covering and wait till the company comes out of bankruptcy and the old stock becomes worthless when new stock is issued. They will be no need to cover ever. IMO the tax will be due when stock is cancelled in BK. This could take many years.

    • Bob- What happens to put position in a BK? My presumption is that you could exercize your option and essentially hold a short position and receive cash. At that point if the stock is worthless you would not have to cover. Is this your read? In the only BK that I have followed, namely Fruit Of The Loom, the stock continued to trade between $1 and $2 even though the stock was essentially worthless. It went to 0 only after the company came out of BK. Warren Buffet bought the company.

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