| Sales & Exchanges / Section 1244 stock |  |
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Ordinarily, a loss on a sale or
exchange of stock is a capital loss. Capital loss treatment is generally
less advantageous than ordinary deduction treatment because of the fact
that a capital loss recognized by an individual is applied, first
against capital gain (which is usually subject to tax at a maximum
marginal rate which is lower than that on ordinary income), and, to the
extent it exceeds capital gains recognized during the year, is subject
to limitations on deductibility. Fortunately, the tax law allows
ordinary loss treatment on certain losses with respect to stock of small
corporations. In general, this special treatment is only available if
the following conditions are satisfied: (1) As of the time the stock was
issued, the aggregate amount that was received by the issuing
corporation for stock, as contributions to capital and as paid-in
surplus, must not have exceeded $1 million. (2) The stock must have been issued
for money or property (but not as compensation for services). (3) For the five years before the
year the loss was sustained, the corporation must not have received 50%
or more of its receipts from certain passive sources. (4) The taxpayer claiming the
special treatment must be an individual (including, if certain
conditions are satisfied, individuals who claim the loss through holding
an interest in a partnership that is selling the stock). The special
treatment isn't available to corporations, trusts or estates. (5) The stock must have been issued
to the individual claiming the special treatment, or to the partnership
through which the individual is claiming the special treatment, and held
continuously by that individual (or partnership) to the time of sale.
In any year, the total loss treated as ordinary under these rules can't be more than $50,000 (or $100,000 if you file a joint return). |
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