Worthless Stock: Capital Loss or Ordinary Loss?
Worthless stock usually points toward capital-loss treatment, but qualifying Section 1244 stock can create a limited ordinary-loss benefit under current law.
Worthless securities
A security that becomes completely worthless can generally be treated as sold on the applicable deemed-disposition date under capital-loss rules.
Section 1244 stock
Qualifying original-issue stock of a qualifying small business corporation can allow limited ordinary-loss treatment when statutory requirements are met.
Why ordinary treatment matters
Ordinary losses can be more valuable than capital losses because capital-loss deductions are subject to separate limitations.
Current limits
Use current-year materials for the exact dollar limitation and qualification details.
The takeaway
Identify whether the security qualifies for a special statutory exception before defaulting to capital-loss treatment.
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FAQ
Does all worthless stock create an ordinary loss?
No.
Can qualifying Section 1244 stock create ordinary-loss treatment?
Yes.
Should exact annual limits be checked in current materials?
Yes.