Question

On September 3, 2012, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2012, the stock was worth $85,000. On August 15, 2013, Able was notified that the stock was worthless. How should Able report this item on his 2013 tax return?

Answer 1

Able should report the loss of the § 1244 stock on his 2013 tax return as an ordinary loss. This allows him to offset ordinary income and potentially receive a larger tax benefit compared to reporting the loss as a capital loss.

Step-by-step explanation:

Able should report the loss of the § 1244 stock on his 2013 tax return as an ordinary loss. Section 1244 of the Internal Revenue Code allows individual taxpayers to treat losses from the sale or worthlessness of qualifying small business corporation (QSBC) stock as ordinary losses, rather than capital losses, which are subject to more restrictive limitations.

To qualify as § 1244 stock, certain requirements must be met. These include being issued by a domestic corporation in exchange for money, property, or services, and meeting the definition of a small business corporation at the time the stock is issued.

Based on the provided information, since Able purchased § 1244 stock in Red Corporation, he can report the loss of the stock as an ordinary loss on his tax return. This allows him to offset ordinary income and potentially receive a larger tax benefit compared to reporting the loss as a capital loss.