By leaving the position open forever and taking a loan against the security.

Where would they get the money to pay installments on the loan? What you're claiming is really just shuffling around which dollar gets taxed.

I'm not sure I understand - to sell short you already need to borrow securities, can you actually take loans against a short position that becomes worth something? That's interesting.

You can Fail-to-deliver and never locate the stock that you are supposed to borrow. Or you can short ETF with this specific company in basket while going long on anything else in this ETF.

Everything you own, even your own debt, can be used as a collateral by creating and selling swaps.

I work in markets. No, you cannot just fail to deliver. I'm also not sure how the ETF thing would work. If it's 1% of the ETF you're going to hedge out the position using a giant notional. It doesn't work.

Official SEC document regarding regulation SHO describes both illegal and legal cases when you can "just" fail to deliver [0]. Market makers which also happen to have hedge-fund branches are having the most flexibility in this.

[0] https://www.sec.gov/investor/pubs/regsho.htm

So it may not be illegal in all cases (although it is in many cases), but how does failing to deliver close out a short position?