Section 1244 Stock

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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 updated in April of 2021 by the Wex Definitions Team]