A short sale occurs when you agree to sell property you do not own (or own but do not wish to sell). You make this type of sale in two steps.
◎You sell short. You borrow property and deliver it to a buyer.
◎You close the sale. At a later date, you either buy substantially identical property and deliver it to the lender or make delivery out of property that you held at the time of the sale. Delivery of property borrowed from another lender does not satisfy this requirement.
You do not realize gain or loss until delivery of property to close the short sale. You will have a capital gain or loss if the property used to close the short sale is a capital asset.