How Is a “Short Sale” Treated for Tax Purposes upon Physical Delivery?

For a physically-settled short sale of a derivative, the tax treatment is complex. The closing of the short position by delivering the asset can trigger a capital gain or loss on the derivative contract.

Separately, the act of delivering the asset itself (if the seller had to acquire it) may also trigger a gain or loss on the underlying asset, depending on the price at which it was acquired.