Why would it be tax free? Until the position is closed out it'd be an unrealized gain but there's nothing special about shorting. Gains are not taxed until they're actually realized by closing out the position.
Maybe I misremembered something and cannot find a source now, but I think there was some way to avoid paying tax on short sales when company goes bankrupt and gets delisted.
EDIT: See sibling comment.
EDIT 2: Am I reading this right? almost 1,800,000 shares failed to deliver just in one day of Sep 22nd? [0]
If the company actually goes bankrupt and their stock is delisted from exchanges, covering your position becomes much harder since liquidity is greatly reduced.
I think the ideal scenario for a short seller is if the stock loses 99%, stays listed, they cover, then it gets delisted.
You have that wrong; bankruptcy is the ideal scenario for somebody with a short position. The brokerage writes it off. The shares are worthless, so why go after somebody for owing you $0?
No-one's going to go after you. The problem is that you have to keep paying the fee to borrow shares, and you can never repay that loan because there are no shares available anywhere.
> He shorted some stocks that he thought were frauds, and the SEC agreed that they were frauds and halted them, and then ... things got worse for him. The shares were worthless, but they didn't trade at zero or $0.01 or whatever: They didn't trade at all, so he couldn't buy them back to deliver to his stock lenders.
Usually short sellers do manage to cover at some point before the stock completely stops trading though.
I'm not sure I understand - to sell short you already need to borrow securities, can you actually take loans against a short position that becomes worth something? That's interesting.
You can Fail-to-deliver and never locate the stock that you are supposed to borrow. Or you can short ETF with this specific company in basket while going long on anything else in this ETF.
Everything you own, even your own debt, can be used as a collateral by creating and selling swaps.
I work in markets. No, you cannot just fail to deliver. I'm also not sure how the ETF thing would work. If it's 1% of the ETF you're going to hedge out the position using a giant notional. It doesn't work.
Official SEC document regarding regulation SHO describes both illegal and legal cases when you can "just" fail to deliver [0]. Market makers which also happen to have hedge-fund branches are having the most flexibility in this.
