Selling short means you sell a stock you don't yet own and deliver the shares at a later time. This allows you to take advantage of decreases in stock value. If the price falls, you can buy the shares for less than you sold them for. However, you can’t short sell in an IRA. The rules for shorting stocks conflict with Internal Revenue Service regulations pertaining to IRA transactions.
No Shorting an IRA
IRS rules state that you cannot borrow money from an IRA to make investments and you can’t use IRA assets as collateral. When you sell a stock short, you must borrow the shares from your broker to ensure they are on hand when you complete the short sale. The assets in your account are pledged as collateral for the borrowed shares. This makes a short sale a prohibited transaction for an IRA. According to the IRS, engaging in a prohibited transaction can cause the account to cease being an IRA. All the funds in the account -- not just the money used for the short sale -- are considered a distribution. This means they are subject to income taxes in the year you made the short sale. You also might have to pay a 10 percent tax penalty for making an early distribution.
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