Worthless Securities and Section 1244 Stocks. CPA Exam

Worthless securities and Section 1244 small business stock explained for the CPA Exam REG section — how do you deduct a loss when a stock becomes completely worthless, and why does Section 1244 let you treat those losses differently? This lecture walks accounting students and CPA candidates through the worthless securities rules, holding-period and capital-loss treatment, and the Section 1244 ordinary-loss election, with Professor Farhat's step-by-step exam approach. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction 0:00 — Worthless Securities: definition and tax treatment 2:22 — Section 1244 Stock: qualification and tax advantages 8:42 — Key Computation Strategy: ordering ordinary vs. capital losses Frequently Asked Questions: When is a security considered worthless for tax purposes? A security is treated as sold on the last day of the tax year in which it becomes completely worthless, for zero proceeds. The holding period runs from the purchase date to December 31 of that year, which determines whether the resulting capital loss is short-term or long-term. What is the annual limit on deducting capital losses? Net capital losses are generally deductible against ordinary income up to $3,000 per year, with any remaining loss carried forward to offset future capital gains and income. What makes Section 1244 stock different from ordinary stock? If Section 1244 small business stock loses value, the loss can be treated as an ordinary loss rather than a capital loss — up to $50,000 for single filers or $100,000 for married filing jointly — which can offset high-tax ordinary income such as wages. How should you order Section 1244 gains and losses on the exam? Apply the ordinary-loss treatment first to reduce ordinary income, then run any remaining amounts through the capital loss rules, rather than netting the gains and losses together immediately. Does Section 1244 apply to any small business? It applies to stock issued by a domestic small business corporation where total capital contributions did not exceed $1 million at the time of issuance. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #REG #Taxation #Section1244 #capitallosses #ProfessorFarhat #accountingstudents