Deducting a Loss on Small Business Stock (Section 1244)

Reminder: If you need a refresher on the difference between an ordinary loss and a capital loss click here.

IRC Section 1244 pertains to the tax treatment of losses on small business stock issued by a corporation.

Only individuals may claim an ordinary loss deduction on Section 1244 stock.

See the rules on who can claim an ordinary loss deduction on Section 1244 stock.

The Tax Benefit Under Section 1244

Being allowed to deduct a loss on Section 1244 stock as an ordinary loss rather than a capital loss is the tax benefit.

If you own stock in a qualifying small corporation and the business fails causing its stock to become worthless, you can claim an ordinary loss, up to certain limits, against your other sources of income.

You must be the original purchaser of the stock to qualify for ordinary loss treatment.

An ordinary loss is more beneficial than a capital loss because it is fully (100%) deductible in a tax year.

A capital loss is only deductible up to a maximum of $3,000 per year. Any excess capital loss over $3,000 must be carried over to the next tax year.

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