Short Selling Stocks in an IRA May Risk the Tax-Deferred Status of the Entire IRA

【Short Selling Stocks in an IRA May Risk the Tax-Deferred Status of the Entire IRA. Do Not Use an IRA Account for Stock Short Selling as a Hedge.】CLEC Club Written date: June 02, 2019

Everyone should note that some online information says using an IRA account for short selling may cause the entire account to lose its tax-deferred function, which would create serious damage.

I suggest everyone not use an IRA for short selling for now. Only use inverse ETFs such as SH and PSQ for hedging.

Online information says that short selling in a retirement account may cause your entire retirement account to lose its tax-deferred function.

Although I still cannot find an explanation on the official IRS website, if anyone has information in this area, please provide it. But for safety, everyone should not do short selling in retirement accounts. Instead, use inverse indexes for hedging. But the hedging function for individual stocks will be reduced. If hedging AAPL or AMZN, buying inverse PSQ may still work because the correlation with the index is large. But for smaller stocks such as SQ and PYPL, because their correlation with the index is not large, the hedging function will be reduced.

The online information is below:

『Prohibited transactions

Regardless of what you invest in,you should avoid prohibited transactions,since they could cause your entire IRA to lose tax-deferred status. Prohibited transactions include these:

• Borrowing money from your IRA (for example,treating it as a margin account)

• Selling property to it

• Receiving unreasonable compensation for managing it

• Using it as security for a loan

• Using IRA funds to buy property for personal use (not including the first-time homebuyer exemption)

If you engage in a prohibited transaction,your entire account stops being an IRA as of the first day of that year and the account is treated as having made a taxable distribution of all its assets to you based on fair market value on the first day of the year. This is as bad as it sounds— engaging in a prohibited transaction could result in the destruction of your IRA.』

https://www.schwab.com/....../insights/content/ira-tax-traps

『The problem with short-selling in retirement accounts is that because of the way tax laws interact with short-sale rules, you can't do it. To sell stocks short, you have to have a margin account. But the IRS treats margin trading in an IRA as a taxable distribution, forcing you to pay tax and penalties even if you leave your money in the account.』