Section 1244 Stock Loss Ordinary 2026 Calculator

IRC §1244 is a small-business shareholder protection rule that converts what would otherwise be a slow-burn capital loss into a fast ordinary loss. For a startup that fails, this often means tens of thousands of dollars in immediate tax refund instead of writing off $3,000 per year for 17 years.

The $50K / $100K Ordinary Loss Limit

Under IRC §1244(b), the maximum ordinary loss treatment per tax year is $50,000 for single filers (also HOH, MFS) and $100,000 for married filing jointly — even if only one spouse owns the stock. Loss above that limit is a capital loss, deductible at $3,000/year against ordinary income with the rest carried forward indefinitely. Example: $150K loss for a joint filer = $100K ordinary (full deduction against W-2 wages) + $50K capital ($3K/yr write-off, $47K carryforward).

Qualifying Small Business Corporation Test

To qualify under §1244(c), three things must be true at issuance: (1) Domestic C or S corporation; (2) Aggregate paid-in capital ≤ $1,000,000 when the stock was issued (the "small business" test); (3) More than 50% of gross receipts for the five years before the loss came from active business operations — not passive investments. Stock must have been issued for money or property (not services), and you must be the original shareholder — buying §1244 stock from another holder kills the treatment.

Worthlessness vs. Sale — Both Qualify

§1244 treatment applies whether you sell the stock at a loss or it becomes worthless under IRC §165(g). For complete worthlessness, claim the loss in the year the stock became worthless — not when you officially gave up. The IRS treats abandonment, dissolution, and bankruptcy discharge as worthlessness events. Report on Form 4797 Part II (ordinary portion) and Schedule D / Form 8949 (capital portion above the cap).

Common §1244 Mistakes To Avoid

(1) Buying secondary-market shares — §1244 only protects the original investor; transferees get capital loss only. (2) Stock issued for services — pure-service founders' stock fails the "money or property" test; pay yourself cash and reinvest to qualify. (3) Missing the $1M paid-in cap — once cumulative paid-in capital crosses $1M, NEW shares lose §1244 status (existing shares keep it). (4) Forgetting Form 4797 — claiming the ordinary portion on Schedule D instead of Form 4797 Part II is a common return error that triggers IRS notice CP2000. (5) Joint-filer surprise — $100K joint limit applies even if only one spouse holds the stock — you do not need both names on the cap table.

Last updated May 2026. Sources: IRS Form 4797, IRC §1244.