Generally, you must classify your gains and losses as either Ordinary or Capital Gains and Losses.
Generally, you will have a Capital gain or Capital Loss if you sell or exchange a capital asset, such as stock you hold for investment.
As an individual, you can deduct your capital losses up to the amount of your capital gains. If your capital losses exceed your capital gains, you can deduct the excess against ordinary income, but only up to a Limit of $3,000 ($1,500 if you are married filing a separate return).
Within limits, however, you can deduct as an ordinary loss, rather than as a capital loss, a loss on the sale, trade, or worthlessness of “Section 1244 Stock.” The amount you can deduct as an ordinary loss under this rule is limited to $50,000 a year. On a joint return the limit is $100,000, even if only one spouse has this type of loss. Thus, if your loss is $110,000 and your spouse has no loss, you can deduct $100,000 as an ordinary loss on a joint return. The remaining $10,000 is a capital loss. Any gain on Section 1244 stock is a capital gain if the stock is a capital asset in your hands. If you must figure a net operating loss, any ordinary loss from the sale of Section 1244 stock is a business loss.
Section 1244 is stock issued for money or property (other than stock and securities) in a Domestic Small Business Corporation. During its five most recent tax years before the loss, this corporation must have derived more than 50 percent of its gross receipts from other than royalties, rents, dividends, interest, annuities, and gains from sales and trades of stocks or securities. For this purpose, a corporation is a small business corporation if the aggregate amount of money and other property the corporation received for stock, as a contribution to capital, and as paid-in surplus does not exceed $1 million.
You must be the original owner of the stock to be allowed Ordinary Loss Treatment. To claim a deductible loss on stock issued to your partnership, you must have been a partner when the stock was issued and have remained so until the time of the loss. You add your distributive share of the partnership loss to any individual Section 1244 stock loss you may have before applying the ordinary loss limit. If your partnership distributes the stock to you, you cannot treat any later loss on that stock as an ordinary loss. Stock sold through an underwriter is not section 1244 stock unless the underwriter only acted as a selling agent for the corporation.
Stock you receive as a Stock Dividend qualifies as Section 1244 stock if:
(1) you receive it from a Small Business Corporation in which you own stock, and
(2) the stock you own meets the requirements when the Stock Dividend is Distributed.
If you trade your Section 1244 stock for new stock in the same corporation in a reorganization that qualifies as a recapitalization or that is only a change in identity, form, or place of organization, the new stock is Section 1244 stock if the stock you trade meets the requirements when the trade occurs. If you hold Section 1244 Stock and other stock in the same corporation, only that part of the stock you receive that is based on the Section 1244 stock you hold qualifies as Section 1244 stock.
Please call me at your convenience so we can discuss in more detail the rules relating to Section 1244 Stock as they apply to your particular situation.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
Cell: (760)567-3110
Fax: (760)836-0968
Email: DonFitchCPA@paylesstax.com
Website: https://www.paylesstax.com
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 05092021-1 320-235)