If someone sells stock short and then moves out of New York State while the short sale is still open, must they accrue the potential gain and pay New York personal income tax on it on their final resident-period return?

Plain-English summary

Petitioner Paul A. Curtis sold publicly traded stock short - meaning he borrowed stock certificates to deliver to a buyer, planning to later "cover" the sale by buying similar stock and returning it to the lender. While that short sale was still open (not yet covered), Curtis moved out of New York State, changing his status from resident to nonresident partway through the year. He asked the Department whether he had to accrue the potential gain from the still-open short sale and pay New York personal income tax on it on his final resident-period return.

Tax Law § 639(a) generally requires a taxpayer who changes from resident to nonresident to accrue to the resident period any income or gain that accrued before the change of status, regardless of whether the taxpayer uses the cash or accrual method of accounting, and 20 NYCRR 154.10(a) requires the resident-period return to include everything that would be includible on a federal return filed for that period on an accrual basis. But under the general federal accrual rule of Treas. Reg. § 1.451-1(a), income is includible only when all the events fixing the right to receive it have occurred and the amount can be determined with reasonable accuracy. For a short sale specifically, Treas. Reg. § 1.1233-1(a) provides that the sale is deemed consummated only upon delivery of stock to close it out - no gain or loss can be realized until the seller makes a covering purchase and settles with the lender.

Because Curtis's short sale closed only after he had already become a New York nonresident, the amount of any gain could not be fixed with reasonable accuracy while he was still a resident. The Department therefore held that the potential gain was not accruable to his New York resident period under Tax Law § 639(a) and 20 NYCRR 154.10(a): he did not have to report or pay New York tax on that gain on his final resident-period return, regardless of his accounting method.

What this means for you

Investors with open short positions who are planning a move out of New York

If you have an open short sale when you change your residency from New York to another state, the potential gain (or loss) on that position is not accrued to your New York resident period merely because you were still a resident when you opened it. The gain isn't fixed with reasonable accuracy - and so isn't taxable to New York - until you actually close the position with a covering purchase, and that happens after your change of status.

Accountants preparing a final NY resident-period return with unsettled securities positions

When preparing a part-year resident's final resident-period return, don't automatically sweep in unrealized gains or losses from open short sales under the § 639(a) accrual rule. Look to whether the transaction that fixes the amount with reasonable accuracy (here, the covering purchase and delivery under Treas. Reg. § 1.1233-1(a)) occurred before or after the change-of-residency date. If it occurred after, the item is not accruable to the resident period even though the position was opened while the taxpayer was still a New York resident.

Common questions

Q: Why doesn't Tax Law § 639(a)'s accrual requirement force Curtis to report the potential gain on his final resident return?
A: Section 639(a) only requires accruing items that have actually "accrued" under the accrual-method rule of Treas. Reg. § 1.451-1(a) - meaning all events fixing the right to the income have occurred and the amount can be determined with reasonable accuracy. Because the short sale hadn't closed yet, neither condition was met while Curtis was still a resident.

Q: When does gain from a short sale actually become fixed for tax purposes?
A: Under Treas. Reg. § 1.1233-1(a), a short sale is deemed consummated only when the seller delivers stock or property to close it out. No gain or loss can be realized until that covering purchase is made and settled with the lender of the borrowed stock.

Q: Would the answer differ for an ordinary (long) stock sale that simply hadn't settled yet before the move?
A: The opinion addresses only the short-sale mechanics described in Treas. Reg. § 1.1233-1(a), where consummation is expressly tied to the later covering delivery. It doesn't address ordinary stock sales, so it shouldn't be read as extending its reasoning to other unsettled transactions.

Q: Does this mean the gain from closing the short sale escapes New York tax entirely?
A: The opinion answers only whether the gain is accruable to the resident period; it holds that it is not. The gain the individual realizes when the short sale closes is a nonresident-period event and is addressed separately, based on the sourcing rules that apply to a nonresident.

Q: Does it matter whether Curtis was a cash-basis or accrual-basis taxpayer?
A: No. Tax Law § 639(a) requires accrual "regardless of [the individual's] method of accounting." The reason the gain isn't accruable here isn't Curtis's personal accounting method - it's that the amount of gain, if any, genuinely couldn't be determined with reasonable accuracy until the short sale closed.

Q: How does this compare to the Department's earlier rulings on bonuses and annuity payments?
A: The Department applied the same reasonable-accuracy principle in R.W. Kaszubinski, TSB-A-84(2)I (a private annuity payment contingent on the annuitant's date of death wasn't accruable), and Susan Byrne Montgomery, TSB-A-95(7)I (a year-end bonus not yet fixed with reasonable accuracy as of the residency-change date wasn't accruable). The short-sale gain in this opinion failed the same test for the same reason: the amount wasn't yet determinable.

Citations and references

• Tax Law § 639(a) - requires accruing to the resident period any income, gain, loss, or deduction that accrued before a change from resident to nonresident status, regardless of the taxpayer's accounting method
• 20 NYCRR 154.10(a) - the resident-period return must include all items that would be includible on a federal return filed for that period on the accrual basis
• Treas. Reg. § 1.451-1(a) - under an accrual method, income is includible when all events fixing the right to receive it have occurred and the amount can be determined with reasonable accuracy
• Treas. Reg. § 1.1233-1(a) - a short sale is deemed consummated only upon delivery of stock or property to close it out; no gain or loss is realized until the covering purchase and settlement with the lender
• R.W. Kaszubinski, TSB-A-84(2)I - a private annuity payment contingent on the annuitant's date of death could not be determined with reasonable accuracy and was not accruable
• Susan Byrne Montgomery, TSB-A-95(7)I - a year-end bonus not yet fixed with reasonable accuracy as of the residency-change date was not accruable to the resident period

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a96_8i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-96 (8) I
Income Tax
December 24, 1996

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I960911A

On September 11, 1996, a Petition for Advisory Opinion was received from
Paul A. Curtis, P.O. Box 4616, Queensbury, New York 12804.
The issue raised by Petitioner, Paul A. Curtis, is whether an individual
who moves out of New York State is required, under Article 22 of the Tax Law, to
accrue a gain and pay personal income tax on the potential gain from a short sale
on the individual's final New York State resident return.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
An individual sells publicly traded stock short. While the short sale is
still open, the individual moves out of New York State.
Section 639(a) of Article 22 of the Tax Law states that:
[i]f an individual changes status from resident to nonresident [the
individual] shall, regardless of [the individual's] method of
accounting, accrue to the period of residence any items of income,
gain, loss, deduction, items of tax preference or ordinary income
portion of a lump sum distribution accruing prior to the change of
status, with the applicable modifications and adjustments to federal
adjusted gross income, itemized deductions and items of tax
preference under [sections 612, 615 and 622], if not otherwise
properly includible or allowable for New York income tax purposes
for such period or a prior taxable year under [the individual's]
method of accounting.
Pursuant to this provision, a taxpayer who changes his or her status from
resident to nonresident is required to include in the resident portion of his or
her year any income which has accrued before the date of the taxpayer's change
of residence regardless of whether the taxpayer is a cash basis or accrual basis
taxpayer.
Section 154.10(a) of the Personal Income Tax Regulations states
that:
[w]here the resident status of an individual ... changes from
resident to nonresident ... in computing New York taxable income ...
for the resident period, such individual ... must include all items
required to be included if a Federal income tax return were being
filed for the same period on the accrual basis, together with any
other accruals such as deferred gain on installment obligations
which are not otherwise includible or deductible for Federal or New
York State income tax purposes ... either for such resident period
or for a prior taxable period ....
Section 1.451-1 of the Treasury Regulations provides the general rule for
determining the taxable year that income is included in gross income for Federal
income tax purposes, and is instructive in determining whether income has accrued

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Income Tax
December 24, 1996

within the meaning of section 639(a) of the Tax Law. Such section 1.451-1(a)
states, in part, that:
[g]ains, profits, and income are to be included in gross income for
the taxable year in which they are actually or constructively
received by the taxpayer unless includible for a different year in
accordance with the taxpayer's method of accounting.
Under an
accrual method of accounting, income is includible in gross income
when all the events have occurred which fix the right to receive
such income and the amount thereof can be determined with reasonable
accuracy ....
In R. W. Kaszubinski, Adv Op St Tax Commn, May 1, 1984, TSB-A-84(2)I, it
was held that where an amount is received under a private annuity contract
subsequent to the close of the resident period that is contingent upon the date
of death of the annuitant, such amount can not in fact be determined with
reasonable accuracy and is accordingly not accruable under the Federal rule. It
was therefore not subject to the special accrual provision contained in section
654(c)(1) [now section 639(a)] of the Tax Law.
See, Matter of John S.
Litherland, Dec St Tax Comm, August 22, 1972.
In Susan Byrne Montgomery, Adv Op Comm T & F, August 29, 1995, TSB-A­
95(7)I, the petitioner received a bonus of $Y determined at the end of 1990,
based on the petitioner's performance and the profitability of the company.
Pursuant to section 638(c) of the Tax Law, in effect for taxable year 1990 [now
section 639(a)], section 148.10(a) [now section 154.10(a)] of the Personal Income
Tax Regulations and section 1.451-1(a) of the Treasury Regulations, all of the
events that fix the right to receive the bonus of $Y had not occurred and the
amount thereof could not be determined with reasonable accuracy on February 28,
1990. Accordingly, no portion of the bonus of $Y was accruable for the
petitioner's resident period of January 1, 1990 through February 28, 1990.
In this case, the gain from a short sale is at issue. A short sale is a
contract for the sale of shares which the seller does not own or the certificates
for which are not within the seller's control so as to be available for delivery
at the time when, under the rules of the Exchange, delivery must be made. (G. D.
Provost, 269 US 443) The seller, therefore, borrows the stock certificates or
other property to be delivered to the buyer. At a later date, the seller either
purchases similar stock or property necessary to "cover" the sale and delivers
it to the lender. Section 1.1233-1(a) of the Treasury Regulations provides that
a short sale is deemed consummated upon delivery of the stock or property to
close the short sale. No gain or loss can be realized by the seller until the
transaction is closed by a covering purchase and a settlement with the lender of
the borrowed stock. (H.S. Richardson, 121 F2d 1; C. Levis Est., 127 F2d 796; B.
Klinger, 8 TCM 546, Dec. 17,018(M); W.E. Hendricks, 51 TC 235, Dec. 29,225, Affd
per curiam 423 F2d 485).
Accordingly, pursuant to section 1.1233-1(a) of the Treasury Regulations
and Richardson, supra, Levis, supra, Klinger, supra, and Hendricks, supra, the
amount of gain on a short sale cannot be determined until the security to close
the short sale is delivered.
In this case, the short sale is consummated after the individual moves out
of New York State. Therefore, pursuant to section 1.451-1(a) of the Treasury
Regulations and Kaszubinski, supra, and Montgomery, supra, all of the events that
fix the right to receive the gain, if any, will not occur and the amount thereof
can not be determined with reasonable accuracy on the date that the individual

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Income Tax
December 24, 1996

changes status from resident to nonresident. Accordingly, pursuant to section
639(a) of the Tax Law and section 154.10 of the Personal Income Tax Regulations,
where a short sale is open on the date that an individual changes status from
resident to nonresident of New York State, any gain derived when the short sale
is closed during the nonresident period is not accruable for the individual's New
York resident period.

DATED: December 24, 1996

s/John W. Bartlett
Deputy Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.