Constructive Sale Rule - Section 1259

For tax purposes, it's a sale. Constructively, anyway. Like...you constructed a derivatives or other position (think: signed contract, which essentially is a sale), but technically you didn't do every little last legal detail to make it so. Kind of like how you don't start getting taxed on your new home until it's fully done, by inspector standards. So if there's one door knob not installed, then it's not done, and you wait to pay taxes.

With Wall Street people, the taxman isn't so forgiving. So if you own a million stock options at a $1 strike and your stock is now publicly trading at $40, you're $39 in the money. If you then short a million shares at $40, nervous that your own stock will go down (probably not legal, anyway), the IRS would deem that short as a constructive sale of a million shares and tax the snot out of you, basically at ordinary income rates.

So know your sales, or at least what the tax man thinks they comprise, or there's a bad moon arisin' for you.