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What is 1244 Stock?

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  • Written By: Josie Myers
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 July 2014
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1244 stock is a classification on investments used when filing a capital loss on personal taxes with the Internal Revenue Service (IRS). Usually, there is a $3,000 US Dollars (USD) limit on losses that can be counted against personal income. With a 1244 stock, individuals can write off up to $50,000 USD as ordinary loss.

For example, an individual shareholder Bob invests $100,000 USD in stock of Corporation A. Corporation A has a difficult year and its shares drop dramatically, so Bob sells his shares off for $40,000 USD, creating a loss of $60,000 USD. His additional investments are doing well, so he has $10,000 USD in capital gains from other investment sources. Usually, he would be able to claim $10,000 USD capital losses against his capital gains and an additional $3,000 USD of ordinary loss against his other regular W2 income. If the stock in Corporation A qualifies for 1244 status, he can now claim not only the $10,000 USD capital loss against his capital gains, but the additional $50,000 USD in ordinary losses against his regular W2 income.

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There are a few strict requirements that must be met for a stock to qualify as a section 1244 stock. The business must be a small corporation, meaning that the gross receipts including stock sales must not be greater than $1,000,000 USD. It also must have become a corporation after 6 November 1978. For the past five years, the corporation must have received more than 50% of its income from sources outside of its exchange related activities like royalties, dividends, interest, annuities, and sales of securities.

A 1244 stock loss can only be claimed by an individual or partnership, not another corporation or estate. It must have been purchased on the original public offering. The stock itself must be either a common or preferred stock that was purchased with cash or for property, not in exchange of other stock or for services.

The stock is reported on IRS section 1244 form 4797 Part II. The stockholder who claims the loss must keep records that set the Section 1244 stock apart from their other stocks. The IRS requires them to keep detailed documentation. Records should include information that show that the corporation qualifies as a small business corporation and that they were the original holders of the stock, the amount the stock was purchased for and proof that it was a cash or property exchange, any information about property transfers for the stock or dividends issued on it as well as company receipts data for the past five years. In the case of an audit, these documents are required to prove the shareholder's claim that the investment was a 1244 stock.

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Discuss this Article

julies
Post 2

I don't know a lot about trading stocks except for the fact that I don't seem to be very good at it. The few companies I invested in have not done very well and I should have sold them much sooner than I did.

When I was doing my taxes, I remember the carryover of loss was shown as an alert when I was checking my return for errors.

This was just something to let me know it may be a red flag when it came to a possible audit. If a carryover loss of $3000 would be a red flag, I wonder how much a carryover loss of $50,000 would be?

I am sure a 1244 stock loss is scrutinized much more closely than an ordinary loss of $3000.

andee
Post 1

I am familiar with being able to take a $3000 loss on your taxes when it comes to stock sales, but have never heard of a 1244 stock.

I had a a few bad investments over the years and have been able to carry up to $3000 loss for several years on my tax return. Those big losses like that can be pretty hard to swallow.

Being able to carry it over every year until the whole amount is written off is helpful, but it also reminds you of that loss every time you do your taxes.

I can imagine how strict the guidelines would be for a section 1244 stock loss. Being able to write off up to $50,000 would be a huge amount.

Even though you could take that loss, that is a lot of money to lose with just one company.

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