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Section 1244 Stock

Section 1244 stock is a stock transaction pursuant to the Internal Revenue Code provision that allows shareholders of an eligible small business corporation to treat up to $50,000 of losses (or, in the case of a husband and wife filing a joint return , $100,000) from the sale of stock as ordinary losses instead of capital losses. The statutory text of Section 1244 can be found at 26 U.S.C. § 1244 . 

A small business corporation is defined by 26 U.S.C. § 1244(c)(3) , which requires that the aggregate of money and other property received by the corporation for stock does not exceed $1,000,000. That is, if an individual holds stock in a small business corporation, and that stock decreases significantly in value resulting in a loss, then the owners of that stock may be able to deduct that loss as an ordinary loss. 

Normally, under 26 U.S.C. §§ 1221–22 , the sale of stock is treated as either a short-term or long-term capital gain or loss. 26 U.S.C. § 1211 allows deduction of capital losses from the sale of stock only to the extent of the gains from such sales plus the lower of $3,000 or the excess of such losses over such gains. However, § 1244 allows shareholders of a small business corporation who sold stock at a loss to avoid the limitations on deductions and deduct the entire loss from their sale as an ordinary loss immediately in the year of realization. 

[Last reviewed in April of 2021 by the Wex Definitions Team
]

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