What is Section 1244 Stock?
Section 1244 Stock allows investors in qualifying small businesses to deduct ordinary (而非 capital) losses on stock — a significant tax advantage. Learn what qualifies, how the deduction works, and the rules for claiming Section 1244 losses.
What Is Section 1244 Stock?
Section 1244 Stock refers to stock issued by a qualifying domestic small business corporation, named after IRC Section 1244. The defining tax advantage: losses on Section 1244 Stock are treated as ordinary losses — fully deductible against ordinary income — rather than as capital losses, which are subject to annual caps. Schema DefinedTerm: Section 1244 Stock — small business stock issued by a domestic C-corporation meeting specific capital and active business requirements, allowing investors to claim losses as ordinary (而非资本) losses up to annual limits rather than as limited capital losses. This distinction matters enormously. Capital losses are deductible only up to $3,000 per year against ordinary income, with the remainder carried forward indefinitely. Section 1244 losses bypass this limitation — within the annual limits.
Section 1244 Requirements
For stock to qualify as Section 1244 Stock, all of the following must be met: 1. Domestic C-Corporation The issuing company must be a domestic C-corporation — not an S-corp, LLC, LP, or partnership. Most VC-backed startups are C-corps, making Section 1244 potentially relevant. 2. Capitalization Limit At the time the stock is issued, the corporation's total capital (gross assets) must be $1 million or less. This is measured before the capital is raised in the offering. 3. Active Business Requirement For most of the stockholder's holding period, the corporation must be an active business — not primarily in the business of investing, trading, or holding securities. Passive investment companies do not qualify. 4. Original Issue Stock The stock must be original issue stock — purchased directly from the corporation at formation or during a qualified issuance. Stock purchased on the secondary market (from another shareholder) does not qualify, even if the company would otherwise qualify. 5. Individual Investors Only Section 1244 is available to individuals and partnerships consisting entirely of individual partners. C-corporations, S-corporations, and other entities cannot claim Section 1244 treatment.
How Section 1244 Losses Work
Standard capital loss treatment (without Section 1244): - Capital losses offset capital gains first - Net capital losses offset ordinary income up to $3,000/year - Excess losses carry forward indefinitely to future years Section 1244 ordinary loss treatment: - Ordinary losses offset ordinary income dollar-for-dollar - Up to $100,000 per year ($200,000 MFJ) deductible - No offsetting capital gains requirement - Excess above the limit reverts to capital loss treatment
Freelancer/Investor Example
Scenario: Priya invests $75,000 in a startup's Series Seed round. The company qualifies as Section 1244 Stock at the time of investment. Four years later, the company fails and Priya's stock becomes worthless. Without Section 1244: - $75,000 loss → capital loss - Can deduct only $3,000/year against ordinary income - Would take 25 years to fully use the deduction - Remaining loss carries forward indefinitely With Section 1244: - $75,000 loss → ordinary loss (up to $100,000/year limit) - Priya deducts $75,000 against ordinary income in Year 4 - Full $75,000 deduction available immediately - Tax savings depend on Priya's marginal rate: at 32%, saves ~$24,000
Key Planning Considerations
Document Section 1244 status at issuance: The company should document the stock's Section 1244 status when issued. This typically involves maintaining records showing the corporation met all requirements at the time of issuance. Watch the $1 million cap: Companies frequently exceed the $1M capitalization threshold during funding rounds. Once exceeded, new stock issuances cannot qualify as Section 1244 Stock. S-corp conversion risk: If the C-corp elects S-corp status, Section 1244 treatment may be affected for future issuances.
How Eonebill Helps
Tracking investment losses is an important part of your annual tax picture. Eonebill helps you maintain records of all investment transactions, including qualified small business stock, to ensure you can properly document and claim losses at tax time. Always consult a tax professional regarding Section 1244 planning.
Related Terms
- Capital Loss Carryover — how capital losses carry forward - Ordinary Income — income taxed at regular rates - C-Corporation — the entity type that can issue Section 1244 Stock
Related Templates
- Investment Loss Tracking Template - Startup Equity Tracking Template