Par. 16. Section 31.3406(b)(3)-2 is amended by revising paragraph (b)(4) to read as follows:
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(b) * * *
(4) Security short sales —(i) Short sales closed before January 1, 2011 —(A) Amount subject to backup withholding. The amount subject to withholding under section 3406 with respect to a short sale of securities closed before January 1, 2011, is the gross proceeds (as defined in § 1.6045-1(d)(5) of this chapter) of the short sale. At the option of the broker, however, the amount subject to withholding may be the gain upon the closing of the short sale (if any); consequently, the obligation to withhold under section 3406 is deferred until the closing transaction. A broker may use this alternative method of determining the amount subject to withholding under section 3406 for a short sale only if at the time the short sale is initiated, the broker expects that the amount of gain realized upon the closing of the short sale will be determinable from the broker's records. If, due to events unforeseen at the time the short sale was initiated, the broker is unable to determine the basis of the property used to close the short sale, the property is assumed for this purpose to have a basis of zero.
(B) Time of backup withholding. For short sales closed before January 1, 2011, the determination of whether a short seller is subject to withholding under section 3406 must be made on the date of the initiation or closing, as the case may be, or on the date that the initiation or closing, as the case may be, is entered on the broker's books and records.
(ii) Short sales closed on or after January 1, 2011. For short sales closed on or after January 1, 2011, the obligation to withhold under section 3406 is deferred until the short sale is considered closed under section 1233. The determination of whether a short seller is subject to withholding under section 3406 may be made as of either this date or the date that the closing transaction is entered on the broker's books and records. The amount subject to withholding under section 3406 is the gross proceeds (as defined in § 1.6045-1(d)(5) of this chapter) of the short sale. At the option of the broker, however, the amount subject to withholding may be the gain upon the closing of the short sale (if any) if the broker reports both the gross proceeds and basis of the securities on the return of information required by section 6045.
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