A taxpayer holds §1244 small business stock purchased for $200,000. The taxpayer is single. The stock becomes worthless in Year 1. What is the character of the loss?

Answer options:

$200,000 Capital Loss

$100,000 Ordinary Loss; $100,000 Capital Loss

$50,000 Ordinary Loss; $150,000 Capital Loss

$200,000 Ordinary Loss

How to approach this question

Check filing status. Single limit = $50k. MFJ limit = $100k. Allocate loss up to limit as Ordinary, excess as Capital.

Full Answer

C.$50,000 Ordinary Loss; $150,000 Capital Loss✓ Correct

IRC §1244. For a single taxpayer, the maximum ordinary loss is $50,000. The remaining $150,000 is treated as a capital loss (subject to $3,000 annual deduction limit against ordinary income).

Common mistakes

Using the MFJ limit ($100k) for a single taxpayer; treating the whole loss as ordinary.

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