Did I say mandatory? I meant optional! You’re “free” to die in a cardboard box under a freeway as a market capitalist scarecrow warning to the other ants so they keep showing up to make us more!
Investors short a company. As the value drops, the value of the short increases. When the company goes bankrupt, the short play reaches full value, since it costs 0 to buy the shares. It also means that gain is unrealized and has permanent value until the short is exercised, which they never do because it’s a taxable event.
That has absolutely nothing to do with buying a stock, it goes up crazy for a year. Then you owe a huge tax bill despite the stock being worthless the next year when you need to sell it.
Thousands of companies go up one year and go down the next. They aren’t bankrupt.
That’s an unrealized gain to the tax man, but a bank won’t loan you money against it, because like you said, it could drop to zero. If you hold a short position in a company that goes bankrupt then there’s no mechanism for the value to drop after that point. It’s a glitch in the market that can be exploited, if you’re rich enough.
I still don’t understand why you are bringing up the rare case of a company going bankrupt and shorting the stock?
MSFT was $28 in 1998, $58 in 2000 and back to $28 in 2001. You’d have paid capital gains tax for 3 years despite making $0 capital gains and taking $0 losses. There’s no bankruptcy.