8762 / What special rules apply to the deductibility of losses incurred on small business stock?
Generally, shareholders will realize either a capital gain or loss upon the sale or disposition of stock (see Q 8761). However, the taxpayer treats the loss as an ordinary loss if it results from the disposition of certain small business stock under IRC Section 1244.1 The loss could either arise from the sale of the small business stock, or from a determination that the stock is worthless. This ordinary loss treatment is applicable for both common and preferred stock.
Even though an individual may be entitled to ordinary loss treatment upon the sale of
Section 1244 stock, the section does not apply to gains. Therefore, if a taxpayer realizes gain on the sale of Section 1244 stock, the gain is treated as a capital gain.
In a taxable year, the maximum amount of ordinary loss that can be claimed by a taxpayer under these provisions is $50,000 (or $100,000 for a married couple filing a joint tax return).2 Any excess is treated as capital loss (see Q 8633 for a detailed explanation of the treatment of capital losses).