Question

On July 20, 2017, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is 1244 small business stock) for $24,000. On November 10, 2017, Matt pruchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2018, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2018 return?

Answer 1

Loss on sale of Orange Corporation stock under section 1244 = $120000 - ($24000 + $150000) = -$54000, The sale is treated as ordinary sale and losses are treated as ordinary losses for the 2018 return.

=> The sale of Small Business Stock under Section 1244 and loss incurred on such sale, then loss would be treated as Ordinary losses. The losses are not limited to $3000 per year ie. it could exceed the limit of $3000. The losses can be fully deducted in the year of the loss incurred. The losses are not netted against the capital gains at maximum rate 20%, as it is treated as Ordinary losses. The ordinary losses would be offset of other sources of income that is taxed at ordinary rates. The maximum loss that can be taken under section 1244 in any year is $100000 for filing return in joint.