On July 20, 2017, Matt, who files a joint return, bought 3,000 shares of Orange Corporation stock, classified as § 1244 small business stock, for $24,000. He acquired another 1,000 shares of Orange Corporation stock from a friend for $150,000 on November 10, 2017. Matt sold the total 4,000 shares for $120,000 on September 15, 2018. On his 2018 return, how should Matt report the sale of the stock?

Question

On July 20, 2017, Matt, who files a joint return, bought 3,000 shares of Orange Corporation stock, classified as § 1244 small business stock, for $24,000. He acquired another 1,000 shares of Orange Corporation stock from a friend for $150,000 on November 10, 2017. Matt sold the total 4,000 shares for $120,000 on September 15, 2018. On his 2018 return, how should Matt report the sale of the stock?

Business · College · Thu Feb 04 2021

llm

Answered on Fri Nov 17 2023

To report the sale of § 1244 stock, in this case, you need to consider a couple of points:

1. Determine the nature of the loss: § 1244 of the Internal Revenue Code allows taxpayers to treat losses on the sale, exchange, or worthlessness of qualified small business stock as ordinary losses rather than capital losses. There are limits to the amount of ordinary loss that can be claimed: $50,000 for an individual or $100,000 for a joint return.

2. Calculate the amount of loss: To calculate the loss, you subtract the selling price from the adjusted basis of the stock. Matt's total cost basis for the stock is $24,000 + $150,000 = $174,000. He sold the shares for $120,000. Therefore, Matt's realized loss is $174,000 - $120,000 = $54,000.

3. Apply the § 1244 loss limits: Since Matt files a joint return, he can treat up to $100,000 of his loss on the sale of § 1244 stock as an ordinary loss. Since Matt’s loss is $54,000, the entire amount can be reported as an ordinary loss, subject to any further limitations on his tax return.

Reporting on Tax Return: - On Form 1040, the ordinary loss from the § 1244 stock would be reported on Schedule 1, line 14, "Other gains or (losses)" and would flow to Form 1040, line 6, "Total income" or "Adjusted gross income" after being adjusted by other gains or losses. - The ordinary loss can offset ordinary income dollar for dollar, which can be more beneficial than a capital loss, which may be limited to a $3,000 annual deduction against ordinary income if capital losses exceed capital gains. - Additionally, form 4797, "Sales of Business Property" may need to be filed to specifically detail the § 1244 loss.

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