Can I take a §1244 ordinary loss on QSBS if §1202 doesn't apply?

Yes — §1202 and §1244 are independent provisions. §1202 covers gains; §1244 covers losses. A QSBS-eligible position that fails and is sold at a loss can qualify for §1244 ordinary-loss treatment up to $50,000 single / $100,000 MFJ per year, with the excess flowing to capital-loss treatment. The same share lot can be both §1244 and §1202-eligible, but only one applies at any single disposition (gain → §1202; loss → §1244).

What's the $1M aggregate contribution test in §1244?

Per §1244(c)(3), §1244 applies only to corporations whose aggregate amount of money or property received for stock (capital contributions) at issuance does not exceed $1,000,000. The test is cumulative across all stock issuances. A corporation that crosses $1M mid-issuance creates a partial §1244 designation — only stock issued before the $1M threshold was crossed qualifies. Track this carefully during early funding rounds.

Does §1244 require an operating business or can a passive holdco qualify?

Operating business required. Per §1244(c)(1), more than 50% of the corporation's aggregate gross receipts during the 5-year window preceding the loss year must come from sources OTHER than passive investment (rents, royalties, dividends, interest, annuities, sales of securities). Investment holdcos generally fail this test. Treas. Reg. §1.1244(c)-1(e) details the gross-receipts mechanics.

Can a §1244 ordinary loss be carried back or forward?

The §1244 ordinary-loss portion enters the taxpayer's regular taxable-income computation. Any resulting net operating loss (NOL) follows the §172 NOL rules — under current law, post-TCJA NOLs cannot be carried back and can be carried forward indefinitely subject to the 80% taxable-income limitation. The capital-loss portion of a §1244 disposition (excess over the $50k/$100k cap) follows the §1211/§1212 capital-loss rules — $3k/year against ordinary income, indefinite carryforward.

Where is §1244 reported on the tax return?

Form 4797 (Sales of Business Property), Part II, ordinary-loss portion. The capital-loss portion of the loss (excess of total loss over the $50k/$100k ordinary cap) flows to Form 8949 Part II then Schedule D. See the Form 8949 walkthrough for the multi-form filing path.

§1244 small-business-stock loss — when QSBS goes to zero

Q: How does §1244 interact with §165(g) worthless-stock treatment?

Per §165(g)(1), worthless stock is treated as sold on the last day of the taxable year for capital-loss purposes. §1244 then operates on that deemed sale — if the stock would have qualified for §1244 had it been actually sold, the worthless-stock treatment converts up to $50k/$100k of the loss to ordinary. Practitioners should document the worthlessness determination (typically board-approved write-down or bankruptcy court confirmation) for the year-of-worthlessness deduction.

The capital-loss vs ordinary-loss gap

A normal stock loss is a capital loss under §1222. Net capital losses are deductible only against capital gains — and excess loss above net gains is limited to $3,000 per year against ordinary income under §1211(b). A founder who lost $200k on a failed C-corp might take 65+ years to fully absorb a $200k capital loss against ordinary income at the $3,000 annual cap (subject to the unlimited carryforward under §1212(b)).

§1244 lets you take part of that loss as an ordinary loss — fully deductible against ordinary income in the year incurred. For high-bracket taxpayers at the 37% top federal rate, the dollar-of-tax differential vs the $3,000-per-year capital-loss path is substantial. At a $100k §1244 ordinary loss × 37% marginal rate = $37,000 current-year federal tax savings, versus a $3,000 capital-loss deduction × 37% = $1,110 current-year savings.

The qualification tests — six gates

For §1244 to apply, several tests must all be satisfied:

Domestic corporation (§1244(c)(3)). US-incorporated entity; foreign corps are disqualified.
$1M aggregate contribution test (§1244(c)(3)). Total money + property received by the corporation for stock at issuance does not exceed $1,000,000. The cap applies to aggregate contributions across all rounds and all shareholders. A corporation that crosses $1M mid-issuance creates partial §1244 status — only stock issued before the $1M threshold qualifies.
Issued for money or property only(§1244(c)(1)(B)). Not for services. An employee receiving stock as compensation does not qualify for §1244 on that stock; the employee's §1244 status would require separate cash-basis or property-basis issuance.
Operating-company gross-receipts test(§1244(c)(1)(C)). More than 50% of the corporation's aggregate gross receipts for the 5-year window preceding the loss must come from active business — not from rents, royalties, dividends, interest, annuities, or sales of securities. Treas. Reg. §1.1244(c)-1(e) details the mechanics. A failed software startup with $0 revenue passes by default (no gross receipts → no passive disqualification); a real-estate holdco with $5M of rental income fails the test outright.
Original-issuance holder(§1244(a)). You must have received the stock directly from the corporation in exchange for money or property. Secondary purchases — buying shares from another shareholder — don't qualify, regardless of the underlying §1244 status. §1244 follows the original issuance.
Individual or partnership taxpayer (§1244(a) reference). §1244 is available to individuals and partnerships, including trusts and estates in limited circumstances under §1244(d)(4). Corporations holding §1244 stock cannot claim §1244 ordinary-loss treatment.

The dollar caps — annual, not lifetime

$50,000 ordinary-loss treatment per year for single filers.
$100,000 per year for married-filing-jointly. The MFJ cap is per-couple, not per-spouse — §1244(b) treats spouses as a unit for the cap.
Excess goes back to capital-loss treatment — so a $300,000 loss with §1244 in play is $100,000 ordinary + $200,000 capital. The capital portion is deductible against capital gains under §1211, then $3,000/year against ordinary income with indefinite carryforward under §1212(b).
Annual cap, recurring.If you have §1244 losses across multiple years (e.g., $100k in 2026 from Acme failing, $100k in 2027 from Beta failing, both MFJ), each year independently gets the $100k cap. The cap doesn't aggregate.

Worked example — $300k loss

Taxpayer T (MFJ, 37% marginal rate) invested $300,000 in Acme Inc. C-corp QSBS at incorporation in 2024. Acme fails in 2026; T sells the shares for $0. Total loss = $300,000.

§1244 ordinary slice: $100,000 (MFJ cap). Tax savings = $100,000 × 37% = $37,000 in 2026.
Capital-loss slice: $200,000. Available against any 2026 capital gains; excess flows to subsequent years under §1212(b). If T has no other capital gains in 2026, $3,000 offsets ordinary income in 2026 ($1,110 savings at 37%); the remaining $197,000 carries forward. Absorbing the full carryforward against $3k/year of ordinary income takes ~66 years; usually absorbed faster against capital gains in later years.
Total year-1 federal tax savings: $37,000 (ordinary) + $1,110 (capital) = $38,110. Without §1244, year-1 savings would be $1,110 only (cap-loss $3k × 37%).

Note that §1244 turns the up-front tax savings from $1,110 to $38,110 — a 34× uplift in year-one cash flow. The capital-loss carryforward continues to provide long-tail value either way.

Worked example — threshold-crossing during issuance

Corp C issues stock in three rounds:

Round 1, 2023: $400,000 raised. Cumulative: $400k (under $1M).
Round 2, 2024: $500,000 raised. Cumulative: $900k (under $1M).
Round 3, 2025: $400,000 raised. Cumulative: $1.3M (crosses $1M during round).

Per §1244(c)(3), only the stock issued before cumulative contributions crossed $1M qualifies for §1244 status. Round 1 and Round 2 stock is §1244-eligible in full. Of Round 3's $400k, only $100k crosses before the threshold; that $100k slice of Round 3 is §1244-eligible, and the remaining $300k of Round 3 is regular non-§1244 stock. On a Round 3 investor's eventual loss, only the $100k pro-rata slice gets ordinary treatment under §1244; the $300k portion is capital-loss only.

Practitioners typically allocate the threshold-crossing pro rata across the round's investors rather than first-come-first-served. The corporation's §1244 designation documentation should record the threshold crossing and the pro-rata allocation.

§1244 vs §1202 — mutually exclusive at the share-lot level

§1202 and §1244 cover opposite ends of the same C-corp shareholder experience: §1202 is for sales at a gain (large exclusion); §1244 is for sales at a loss (ordinary-loss treatment up to the cap). The same share lot CAN be both §1202-eligible and §1244- eligible simultaneously, but only one applies at any single disposition:

Gain disposition → §1202 may apply per the cap, tier, and hold-period rules. See the 5-year holding pillar and cap pillar.
Loss disposition → §1244 may apply per the $50k/$100k cap and qualification tests above.

For QSBS that goes to a partial loss, neither §1202 nor §1244 covers the situation neatly: §1202 only excludes gain (§1202(a) is silent on losses), and §1244 only applies to the ordinary-loss portion up to the cap. The remainder is regular capital-loss treatment. The decoder routes loss positions (negative gain input) to this §1244 path automatically.

Partial-sale basis reduction — §1244(d)(1)(A)

§1244(d)(1)(A) addresses partial sales: if the §1244 stock is partially sold or partially worthless, the §1244 treatment is limited to the loss attributable to the portion of the original stock that retained §1244 character. If you bought 100,000 shares for $300k at original issuance (basis $3/share) and sold 50,000 of them, the §1244-eligible loss on the 50,000-share slice is computed against the $150k allocated basis, not the full $300k. (§1244(d)(2) is the separate substituted-basis rule, not partial-sale basis reduction.)

§1244(d)(1) — basis adjustments

The §1244-eligible basis is limited to the basis arising from money or property contributed at issuance under §1244(c)(1)(B). Subsequent basis adjustments — e.g., §1367 partnership-passthrough basis adjustments, §358 reorganization basis carryover — do not increase the §1244-eligible basis. The §1244 cap applies to the loss measured against the original issuance basis only.

§165(g) worthless-stock interaction

§165(g)(1) treats worthless stock as sold on the last day of the taxable year for capital-loss purposes. §1244 then operates on that deemed sale: if the stock would have qualified for §1244 had it been actually sold, the worthless-stock treatment converts up to $50k/$100k of the loss to ordinary, with the excess flowing to §1211/§1212 capital-loss rules.

The worthlessness determination requires documentary support — typically a board resolution writing the stock to zero, a Chapter 7 / Chapter 11 confirmation order eliminating equity, or an issuer dissolution. The year of worthlessness is the deduction year; §165(g) does not permit deduction in an earlier year when value appears impaired but has not yet collapsed.

Estate cases — §1244(a) original-issuance

§1244 ordinary-loss treatment requires that the taxpayer claiming the loss be the original-issuance holder. Inherited §1244 stock does NOT qualify for §1244 treatment in the hands of the heir — the heir is not the original issuance holder, and the §1014 basis step-up at death typically eliminates any embedded loss anyway. Estates can claim §1244 treatment on the decedent's pre-death sale if the decedent was the original holder; the post-death period belongs to the heir under regular capital rules.

Common-mistake ladder

Mistake 1: claiming §1244 on secondary-purchase shares. §1244(a) requires original issuance. Secondary buyers from other shareholders never qualify.
Mistake 2: claiming §1244 on services-for-stock issuances.§1244 (c)(1)(B) requires money or property — services don't count. An employee receiving stock as compensation gets a §83-included basis but no §1244 status on that lot.
Mistake 3: ignoring the $1M aggregate threshold.Late-round investors at a corporation that crossed $1M cumulative contributions may have zero §1244 status. Confirm the corporation's contribution history before claiming.
Mistake 4: applying the cap per-share-lot. The $50k/$100k cap is per-year, not per-lot. Multiple §1244 losses in the same year aggregate against the single annual cap.
Mistake 5: forgetting the operating-business gross-receipts test. §1244(c)(1)(C) requires >50% active-business gross receipts in the 5y preceding the loss. Investment holdcos fail; pre-revenue startups pass by default.
Mistake 6: misreporting on Schedule D instead of Form 4797. §1244 ordinary loss goes on Form 4797 Part II, not Schedule D. The capital-loss portion (excess over the cap) goes to Form 8949 then Schedule D.

State conformity bridge

§1244 is a federal ordinary-loss-conversion provision. State conformity varies:

California: conforms to §1244 for personal income tax — the ordinary-loss treatment flows through to the CA return.
Pennsylvania: partial conformity — verify treatment on PA Schedule D / Schedule SP; ordinary-loss character may not flow through identically.
New Jersey: partial decoupling — NJ-1040 treatment may differ; verify with current NJ Division of Taxation guidance.
Texas and no-tax states: federal treatment is the entire picture.

The 50-state griddocuments each state's position.

Documentation to retain

Stock-purchase / subscription agreement with the C-corp establishing original issuance and amount paid.
Corporation's §1244 designation documentation — board resolution or articles of incorporation establishing §1244 stock status, with the $1M aggregate-contribution test documented and the pro-rata allocation if the threshold was crossed mid-issuance.
Corporation's gross-receipts historyfor the 5-year window preceding the loss year, showing >50% active-business receipts under §1244(c)(1)(C).
Worthlessness determination — board resolution, bankruptcy court order, dissolution filing — for §165(g) loss-year claims.
Form 4797 filed with the loss-year return showing the §1244 ordinary portion in Part II.
Form 8949 + Schedule D for the capital-loss portion exceeding the cap.

The §1244-§1202 lifecycle

§1244 and §1202 together describe the full C-corp small-business shareholder lifecycle: §1244 for failed positions, §1202 for successful exits. Founders structuring early- stage C-corps should preserve both: stay under the §1244(c)(3) $1M aggregate threshold while early, document §1244 designation, and simultaneously verify the §1202(d)(1) gross-asset ceiling ($50M / $75M depending on issuance rule set) at each subsequent issuance to maintain QSBS eligibility for future gains. The decoder handles both paths: positive gain → §1202 routing; negative gain → §1244 routing.

For the gain-side mechanics, see the 5-year holding pillar, the cap pillar, the §1045 rollover pillar, and the OBBBA cutover overview. The Form 8949 walkthrough covers the filing mechanics for both gain and loss dispositions. For methodology and citations, see /methodology and /sources; for reviewer credentials, see /about.

Informational, not tax advice. Consult a CPA or Enrolled Agent before acting on a corrective distribution.