{"id":421227,"date":"2025-06-19T12:20:46","date_gmt":"2025-06-19T11:20:46","guid":{"rendered":"https:\/\/seedlegals.com\/?p=421227"},"modified":"2025-06-19T12:20:46","modified_gmt":"2025-06-19T13:20:46","slug":"how-section-1244-could-cut-your-tax-bill","status":"publish","type":"post","link":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/","title":{"rendered":"Startup investment didn\u2019t work out? Section 1244 lets you tax deduct up to $50K per year of losses"},"content":{"rendered":"","protected":false},"excerpt":{"rendered":"<p>Lost money on a startup investment? You can deduct up to $50K\/year from your taxable income.<\/p>\n","protected":false},"author":163,"featured_media":421613,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[146],"tags":[],"event_tags":[],"class_list":["post-421227","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-funding-guides-us"],"acf":{"blog_layout":"v2","v2":{"hero":{"image_background_color":"#E7F1FF","image_fit":"img--cover"},"adverts":[{"type":"selector","selected_advert":{"ID":412070,"post_author":"77","post_date":"2024-11-11 09:48:00","post_date_gmt":"2024-11-11 09:48:00","post_content":"","post_title":"US - Talk to the team","post_excerpt":"","post_status":"publish","comment_status":"closed","ping_status":"closed","post_password":"","post_name":"us-newsletter","to_ping":"","pinged":"","post_modified":"2024-11-13 16:19:20","post_modified_gmt":"2024-11-13 16:19:20","post_content_filtered":"","post_parent":0,"guid":"https:\/\/seedlegals.com\/?post_type=blog_advert&#038;p=412070","menu_order":0,"post_type":"blog_advert","post_mime_type":"","comment_count":"0","filter":"raw"},"custom_advert":{"advert_tracking_id":"","layout":"default","image":{"image":false,"link":""},"text":{"heading":"","content":"","button":null,"background_color":"#EEF4FF","text_color":"#000646"},"form":{"form":{"type":"none","hubspot_form":{"layout":"newsletter","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. You can unsubscribe anytime. View our <a href=\"\/privacy-policy\/\" target=\"_blank\" rel=\"noopener noreferrer\">privacy policy<\/a>"},"custom":{"embed":""},"gtm_form_type":false,"gtm_form_location":false}},"cta_and_testimonials":{"heading":"","button":null,"bullet_points":false,"testimonials":false}}}],"related_sidebar_posts":false},"show_author_card":false,"revision_date":"","hero_image":421613,"has_sources":false,"has_custom_post_authors":true,"is_expert_reviewed":true,"post_content_width":"default","post_content":[{"acf_fc_layout":"text","text":"<p>You invest in a startup for the upside, of course. But what if things don\u2019t go as planned?<\/p>\n<p>That\u2019s where Section 1244 comes in. It lets founders and early investors tax deduct their investment losses when a startup fails, up to $50K per year (or $100K\/year for joint filers). Given the number of start-ups that fail, we&#8217;re absolutely amazed that almost nobody knows about this tax benefit, and we&#8217;re here to change that.<\/p>\n<p>In this article, we explain how Section 1244 works, who qualifies, and how to use it when things don\u2019t work out for your investment.<\/p>\n<h2>What is Section 1244?<\/h2>\n<p><a href=\"https:\/\/www.law.cornell.edu\/uscode\/text\/26\/1244\" target=\"_blank\" rel=\"noopener\">Section 1244 of the Internal Revenue Code<\/a> is a tax rule that helps if your startup investment doesn\u2019t work out. It lets individual investors deduct up to $50,000 of their loss as a federal income tax deduction.<\/p>\n<p>Normally, if you lose money on an investment, it counts as a <em>capital loss<\/em>, and you can only use $3,000 per year of that loss to set off against your other income, like your salary. That means, depending on the scale of your losses, you might have to wait years to get the full benefit.<\/p>\n<p>But Section 1244 turns your investment loss into a much more valuable <em>ordinary loss<\/em>. You can deduct this loss against all types of income \u2013 salary, consulting income, rental income, etc. Plus, since you can deduct up to $50,000, this means you can claim a large chunk of the loss right away and reduce your tax bill in the same year.<\/p>\n<h2>How it works<\/h2>\n<p>Lisa is an angel investor. Three years ago, she invested $40,000 into a startup, receiving stock directly from the company (i.e. she invested for shares, not a SAFE).<\/p>\n<p>Today, the startup has failed and the shares are worthless.<\/p>\n<h3>Without Section 1244:<\/h3>\n<ul>\n<li>Lisa can only claim a capital loss, which is limited to $3,000 per year against her salary or other ordinary income.<\/li>\n<li>It would take over 13 years to use the full $40,000 loss.<\/li>\n<\/ul>\n<h3>With Section 1244:<\/h3>\n<ul>\n<li>Lisa can deduct the full $40,000 as an ordinary loss this year (the year the startup failed).<\/li>\n<li>Assuming Lisa\u2019s federal tax rate is 32%, that saves her $12,800 in taxes now ($40,000 \u00d7 32%).<\/li>\n<\/ul>\n<p>Essentially, Section 1244 helps Lisa get the tax deduction from her failed investment <em>now<\/em>, not slowly over time.<\/p>\n<h2>Who qualifies for the Section 1244 deduction?<\/h2>\n<p>To qualify for Section 1244 treatment, you need to meet these conditions:<\/p>\n<p>\u2705 <strong>You must be an individual (or file jointly with a spouse):<\/strong> Businesses, trusts and funds can\u2019t claim Section 1244. It\u2019s designed to help individual investors and founders.<\/p>\n<p>\u2705 <strong>The company must have been a &#8216;small business corporation&#8217;:<\/strong> At the time the shares were issued, the company must have received no more than $1 million in capital investment. So this usually means you invested in the first funding round or two, for most start-ups.<\/p>\n<p>\u2705 <strong>You bought the stock directly from the company:<\/strong> You need to have acquired your shares in exchange for cash (or property), not by purchasing them from another investor. You also can\u2019t have received the stock for services you\u2019ve done.<\/p>\n<p>\u2705 <strong>The company used the funds in an active trade or business:<\/strong> At least 50% of the company&#8217;s revenues must have come from active operations, not passive investments (like holding real estate or rental income). Most startups will meet this test.<\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":true,"content":"<b>What about debt that\u2019s converted to stock?<\/b><br \/>\r\n<br \/>\r\nStock received in exchange for debt (including SAFEs and convertible notes) may qualify for Section 1244, so long as the SAFEs have converted into equity prior to the company going into administration (noting that many startups go into \u2018zombie mode\u2019 and stay that way for years rather than the founders putting the company into administration).<br \/>\r\n<br \/>\r\nIf conversion happens when the company is already winding down or insolvent, your new shares could be treated by the IRS as having \u2018zero basis\u2019, meaning no deductible loss.<br \/>\r\n<br \/>\r\nThis means Section 1244 relief may not apply if conversion happens too late in the process.","link":null},{"acf_fc_layout":"text","text":"<h2>Can founders benefit from Section 1244 deductions?<\/h2>\n<p>If you\u2019re a founder, Section 1244 could benefit you too, but only if you invested money into the company in exchange for stock.<\/p>\n<p>If you put in cash (like funding your own seed round) and the company properly issued you shares for that investment, you could qualify for a Section 1244 loss if things don\u2019t work out.<\/p>\n<p>But shares you received just for founding the company or as part of your initial incorporation of the company, don\u2019t qualify.<\/p>\n<h2>When do you claim the deduction?<\/h2>\n<p>You can take the deduction in the year the loss becomes final, typically the year when:<\/p>\n<ul>\n<li>the stock becomes worthless, or<\/li>\n<li>you sell the stock at a loss<\/li>\n<\/ul>\n<p>The loss is reported using <a href=\"https:\/\/www.irs.gov\/pub\/irs-pdf\/f4797.pdf\" target=\"_blank\" rel=\"noopener\">Form 4797<\/a>, where you input the loss in line 10 column (a) and then add the allowable loss in column (g).<\/p>\n"},{"acf_fc_layout":"image","image":{"ID":421827,"id":421827,"title":"Form 4797 (1)","filename":"Form_4797_1.png","filesize":275938,"url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1.png","link":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1.png","alt":"Form 4797","author":"163","description":"Form 4797","caption":"Form 4797","name":"form_4797_1","status":"inherit","uploaded_to":421227,"date":"2025-06-19 11:14:05","modified":"2025-06-19 11:14:19","menu_order":0,"mime_type":"image\/png","type":"image","subtype":"png","icon":"https:\/\/seedlegals.com\/wp-includes\/images\/media\/default.png","width":994,"height":936,"sizes":{"thumbnail":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1-150x150.png","thumbnail-width":150,"thumbnail-height":150,"medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1-300x282.png","medium-width":300,"medium-height":282,"medium_large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1.png","medium_large-width":768,"medium_large-height":723,"large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1.png","large-width":994,"large-height":936,"_themosis_media":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1-100x100.png","_themosis_media-width":100,"_themosis_media-height":100,"1536x1536":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1.png","1536x1536-width":994,"1536x1536-height":936,"2048x2048":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1.png","2048x2048-width":994,"2048x2048-height":936,"themosis":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1-200x150.png","themosis-width":200,"themosis-height":150,"tog-small":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1-300x282.png","tog-small-width":300,"tog-small-height":282,"tog-medium":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1-600x565.png","tog-medium-width":600,"tog-medium-height":565,"tog-large":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1.png","tog-large-width":994,"tog-large-height":936,"tog-huge":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/Form_4797_1.png","tog-huge-width":994,"tog-huge-height":936}},"caption":"","width":"100","alignment":"left"},{"acf_fc_layout":"text","text":"<p>If your total loss is more than the Section 1244 limit of $50,000, the remainder is treated as a capital loss and should be reported on <a href=\"https:\/\/www.irs.gov\/pub\/irs-pdf\/f1040sd.pdf\" target=\"_blank\" rel=\"noopener\">Schedule D<\/a> and <a href=\"https:\/\/www.irs.gov\/pub\/irs-pdf\/f8949.pdf\" target=\"_blank\" rel=\"noopener\">Form 8949<\/a>.<\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":true,"content":"If a startup is still operating but it\u2019s struggling and seems unlikely to recover, you might not be able to declare the stock as 'worthless' yet.<br \/>\r\n<br \/>\r\nThe IRS generally requires the company to be completely shut down or formally dissolved before you can claim the loss.<br \/>\r\n<br \/>\r\nIf you\u2019re unsure, it\u2019s best to check with a tax advisor.","link":""},{"acf_fc_layout":"text","text":"<h2>How do you prove your shares qualify?<\/h2>\n<p>The IRS doesn\u2019t require you to file anything at the time of investment, but you\u2019ll need to have documentation ready if you\u2019re ever audited.<\/p>\n<p>Here\u2019s what you should keep to be safe:<\/p>\n<ul>\n<li>Stock purchase agreement<\/li>\n<li>Cap table from the time of the stock issuance, showing they\u2019ve raised under $1 million<\/li>\n<li>Proof the shares were bought for cash (not services)<\/li>\n<li>Company financials showing it was engaged in an active business<\/li>\n<\/ul>\n<p>You&#8217;ll also need a clear &#8216;loss event&#8217; to show the stock is worthless \u2013 like the company shutting down or you transferring the shares for no value.<\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":true,"content":"<b>Can you get Section 1244 relief if you invest with a SAFE or convertible note?<\/b><br \/>\r\n<br \/>\r\nYou generally cannot claim Section 1244 ordinary loss relief for an investment made via a SAFE (Simple Agreement for Future Equity) or convertible note until and unless it has converted into stock. <br \/>\r\n<br \/>\r\nIf your SAFE or note was converted into stock before the company failed and the shares met the other requirements (like being issued for cash while the company had less than $1m in capital), then you might still qualify.","link":null},{"acf_fc_layout":"text","text":"<p>If you&#8217;re unsure whether the company qualified, it might be worth reaching out to the founders or the company\u2019s accountants to verify this.<\/p>\n<h2>Can Section 1244 and QSBS be used together?<\/h2>\n<p>Yes \u2013 and this is where smart tax planning can really pay off.<\/p>\n"},{"acf_fc_layout":"content_highlight","highlight_type":"tip","background_colour":"blue","show_icon":true,"content":"If you\u2019re a founder and want to learn more about how QSBS can help save you and your investor money, check out our <a href=\"https:\/\/seedlegals.com\/us\/resources\/qsbs-for-founders\/\" target=\"_blank\">QSBS guide for founders.<\/a><br \/>\r\n<br \/>\r\nInvestors, if you want to know how to qualify for QSBS and potentially save millions in capital gains taxes, we\u2019ve written an article on <a href=\"https:\/\/seedlegals.com\/us\/resources\/qsbs-for-investors\/\" target=\"_blank\">QSBS for investors.<\/a>","link":null},{"acf_fc_layout":"text","text":"<p>If the startup succeeds, and you <a href=\"https:\/\/seedlegals.com\/us\/resources\/qsbs-for-investors\/\" target=\"_blank\" rel=\"noopener\">meet all the QSBS criteria<\/a> (for example, holding your stock for over 5 years), you may qualify to exclude up to $10 million of your gains from federal tax under Section 1202.<\/p>\n<p>But if the startup fails, Section 1244 may let you write off up to $50,000 as an ordinary loss, reducing your tax bill right away.<\/p>\n<p>Together, QSBS and Section 1244 can offer valuable tax relief \u2013 a potentially huge benefit if things go well and a smaller one if they don\u2019t.<\/p>\n<h2>What should you do next?<\/h2>\n<p>If you&#8217;re investing in a startup, it&#8217;s worth understanding how tax rules like Section 1244 could apply \u2013 especially if things don\u2019t go to plan.<\/p>\n<p>Here\u2019s what you should do:<\/p>\n<ul>\n<li>Check if your shares qualify for Section 1244<\/li>\n<li>Collect your documentation<\/li>\n<li>Talk to a tax advisor to make sure the loss is properly recorded<\/li>\n<li>If you\u2019re a founder whose business is struggling, you can share this article with your investors \u2013 it could help soften the blow of any losses<\/li>\n<\/ul>\n<p>If you\u2019re an early-stage angel investor, investing in companies that have raised less than $1M (and hence still qualify for Section 1244 loss relief) then you should think about <strong>demanding stock in the company immediately<\/strong>, rather than investing with a SAFE, when you may never get your loss relief if the company fails.<\/p>\n<p>Thanks to the ease of doing a priced round on SeedLegals, it now makes sense to talk to the founders about investing via a priced round instead of a SAFE. SeedLegals offers NVCA-compliant priced rounds at a fraction of the cost of a law firm so you can get stock right from the outset.<\/p>\n<h2>Built for founders, trusted by investors<\/h2>\n<p>From raising your first round to maximizing your tax benefits at exit, SeedLegals is the go-to platform for startup funding, equity and legal essentials.<\/p>\n<p>Book a free call with our team below or <a href=\"https:\/\/app.seedlegals.com\/signup\" target=\"_blank\" rel=\"noopener\">start your 7-day free trial here.<\/a><\/p>\n"},{"acf_fc_layout":"form","layout":"custom","heading":"Get answers fast, for free","content":"Bring all your questions - we\u2019ve got the answers!\r\nWe\u2019ll match you with the right specialist.","custom":{"image":false,"button_text":"Get Started","form":{"type":"hubspot","hubspot_form":{"layout":"default","hide_founderinvestor_toggle":false,"default_community":"founder","custom_form_id":"21723609-6f1b-45c0-9691-77d462dc3bed","gdpr_disclaimer":"By subscribing, you agree to receive information from SeedLegals. You can unsubscribe anytime. View our <a href=\"\/privacy-policy\/\" target=\"_blank\" rel=\"noopener noreferrer\">privacy policy<\/a>"},"custom":{"embed":""},"gtm_form_type":"default","gtm_form_location":"default"}},"add_shadow":false}],"related_posts":false,"custom_post_authors":{"authors":[{"author":{"ID":169,"user_firstname":"Idin","user_lastname":"Sabahipour","nickname":"Idin Sabahipour","user_nicename":"idin-sabahipour","display_name":"Idin Sabahipour","user_email":"idin@seedlegals.com","user_url":"","user_registered":"2024-08-29 09:55:07","user_description":"","user_avatar":"<img alt='' src='https:\/\/secure.gravatar.com\/avatar\/45fe33a1de890806e7ec6d8ac105288d6228c292c65cf28e96818af3496fd572?s=96&#038;d=mm&#038;r=g' srcset='https:\/\/secure.gravatar.com\/avatar\/45fe33a1de890806e7ec6d8ac105288d6228c292c65cf28e96818af3496fd572?s=192&#038;d=mm&#038;r=g 2x' class='avatar avatar-96 photo' height='96' width='96' loading='lazy' decoding='async'\/>"},"role":"Writer"}]},"expert_reviewed":{"heading":"Expert reviewed","tooltip_message":"This article has been fact-checked by a SeedLegals subject matter expert.<br><br><a href=\"https:\/\/seedlegals.com\/authors-and-experts\/\" target=\"_blank\">Meet our experts<\/a> and learn more about our review process and quality assurance in our <a href=\"https:\/\/seedlegals.com\/editorial-policy\/\" target=\"_blank\">editorial policy<\/a>."}},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Startup investment didn\u2019t work out? Section 1244 lets you tax deduct up to $50K per year of losses | SeedLegals<\/title>\n<meta name=\"description\" content=\"Use Section 1244 to turn investment losses into tax savings by deducting up to $50,000 against salary or other income in the same year.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Startup investment didn\u2019t work out? 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Section 1244 lets you tax deduct up to $50K per year of losses | SeedLegals","description":"Use Section 1244 to turn investment losses into tax savings by deducting up to $50,000 against salary or other income in the same year.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/","og_type":"article","og_title":"Startup investment didn\u2019t work out? Section 1244 lets you tax deduct up to $50K per year of losses | SeedLegals","og_description":"Use Section 1244 to turn investment losses into tax savings by deducting up to $50,000 against salary or other income in the same year.","og_url":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/","og_site_name":"SeedLegals","article_publisher":"https:\/\/www.facebook.com\/seedlegals\/","article_published_time":"2025-06-19T11:20:46+00:00","article_modified_time":"2025-06-19T13:20:46+00:00","og_image":[{"width":2816,"height":1584,"url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/hero_section-1244-write-off.png","type":"image\/png"}],"author":"Carys Brain","twitter_card":"summary_large_image","twitter_creator":"@seedlegals","twitter_site":"@seedlegals","twitter_misc":{"Written by":"Carys Brain","Est. reading time":"1 minute"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/#article","isPartOf":{"@id":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/"},"author":{"name":"Carys Brain","@id":"https:\/\/seedlegals.com\/us\/#\/schema\/person\/764f5b947c78e0fdd73b0a8ca404c3c8"},"headline":"Startup investment didn\u2019t work out? 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Section 1244 lets you tax deduct up to $50K per year of losses | SeedLegals","isPartOf":{"@id":"https:\/\/seedlegals.com\/us\/#website"},"primaryImageOfPage":{"@id":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/#primaryimage"},"image":{"@id":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/#primaryimage"},"thumbnailUrl":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/hero_section-1244-write-off.png","datePublished":"2025-06-19T11:20:46+00:00","dateModified":"2025-06-19T13:20:46+00:00","description":"Use Section 1244 to turn investment losses into tax savings by deducting up to $50,000 against salary or other income in the same year.","breadcrumb":{"@id":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/"]}]},{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/#primaryimage","url":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/hero_section-1244-write-off.png","contentUrl":"https:\/\/seedlegals.com\/wp-content\/uploads\/2025\/06\/hero_section-1244-write-off.png","width":2816,"height":1584,"caption":"Hero Section 1244 Write Off"},{"@type":"BreadcrumbList","@id":"https:\/\/seedlegals.com\/us\/resources\/how-section-1244-could-cut-your-tax-bill\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/seedlegals.com\/us\/"},{"@type":"ListItem","position":2,"name":"Startup investment didn\u2019t work out? 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