Definition
The term against the box refers to the practice of selling short securities that are held in safekeeping or owned. Selling short against the box provided investors with a mechanism to defer paying federal income tax on a capital gain.
Explanation
When an investor sells short equities they own, this is referred to as selling short against the box. (At one time, this phrase implied the stock certificates were held in a safe deposit box.) By doing so, the investor establishes a neutral position in the security. This means their profit is now fixed. The investor has agreed to sell their shares at a certain price. Gains or losses on the short sale will be exactly offset by the loss or gain on the market price of the security they own.
Prior to 1997, selling short against the box would allow an investor to delay taking a capital gain in a given calendar year. A taxpayer might want to do this if the capital gain will trigger a federal income tax withholding penalty or to offset a capital loss they expect to take in the following calendar year. The Taxpayer Relief Act of 1997 closed this loophole. Under the current law, selling short against the box will no longer defer the payment of income taxes on a capital gain.
Related Terms
- The term statistical arbitrage refers to the practice of using sophisticated mathematical models to identify potential profit opportunities from a pricing inefficiency that exists between two or more securities. Statistical arbitrage requires the use of high speed computers, computational models, as well as complex trading systems.
Moneyzine EditorNovember 6th, 2024 
The term bond arbitrage refers to the practice of refinancing a higher-rate bond prior to its call date with a lower rate security. Issuing arbitrage bonds is an effective strategy when interest rates are declining.Moneyzine EditorNovember 6th, 2024- The term stale price arbitrage refers to the ability to profit from the price of securities that do not reflect all of the available market information. Stale price arbitrage is possible because securities are traded on exchanges located in different time zones.Moneyzine EditorSeptember 21st, 2023
The term international arbitrage refers to the practice of simultaneously buying and selling a foreign security on two different exchanges. International arbitrage is profitable when pricing inefficiencies occur due to factors such as timing and exchange rates.Moneyzine EditorNovember 6th, 2024
The term discount arbitrage refers to the practice of simultaneously buying a discount option and taking the opposite position in the underlying security. Discount arbitrage is considered a riskless strategy, since the trader is engaging in a covered option.Moneyzine EditorNovember 6th, 2024- The term Regulation SHO refers to legislation that updated and strengthened the laws concerning short sales of securities. Regulation SHO established trading standards intended to lower the opportunity for traders to engage in unethical naked short selling practices.Moneyzine EditorNovember 6th, 2024
The term failure to deliver refers to a transaction involving the exchange of assets, wherein one party does not deliver their asset. Failure to deliver typically refers to the inability of one party to provide securities to their broker.Moneyzine EditorNovember 6th, 2024
The term aged fail refers to a transaction between two brokers that remains open 30 days or more after the settlement date. Aged fails can occur when a party that agreed to sell securities does not deliver them to their broker.Moneyzine EditorNovember 6th, 2024
