An individual, filing as single for the 2025 tax year, sells Section 1244 stock at a loss. Under IRC Section 1244, what is the maximum amount of that loss the individual may treat as an ordinary loss (rather than a capital loss) for the year?
- $50,000
- $100,000, the same limit that applies to a married couple filing a joint return
- $250,000, matching the small business corporation's own capitalization ceiling under the same section
- There is no dollar cap; the entire loss is ordinary as long as the issuing corporation met the small business corporation requirements when the stock was issued
Why A? And why not the others?
Correct answer: A. $50,000
IRC Section 1244(b) caps the amount of loss on qualifying small business stock that an individual may treat as an ordinary loss in a single year at $50,000, or $100,000 for spouses filing a joint return; any loss beyond that annual cap is treated as an ordinary capital loss subject to the usual capital loss limitations, regardless of how large the total loss is. The option stating $100,000 gives the joint-return figure, which does not apply to a single filer in this fact pattern. The option stating $250,000 confuses the annual ordinary-loss cap with a different number entirely: Section 1244(c)(3) separately requires that the corporation not have received more than $1,000,000 in aggregate money and property for its stock to qualify as a small business corporation in the first place, a test about the issuer's capitalization rather than about the amount of loss an investor may deduct. The option claiming there is no dollar cap ignores that the $50,000/$100,000 ceiling is a defining, mandatory feature of Section 1244 regardless of whether the issuing corporation met the small business corporation requirements.
Source: IRC Section 1244(b) and (c)(3)