When things go bad on a startup investment in a C Corporation. Section 1244 of the Internal Revenue code allows you to treat certain losses as ordinary on up to $50,000 ($100,000 married filing jointly) in a year instead of a capital loss, which is limited to $3,000 in excess of capital gains.

To qualify the stock / investment must meet the following requirements:

  1. As of the time the stock was issued, the aggregate amount that was received by the issuing corporation for stock, as contributions to capital and as paid-in surplus, must not have exceeded $1 million.
  2. The stock must have been issued for money or property (other than stock or securities). Thus, the stock can’t be issued as compensation for services.
  3. For the five years before the year the loss was sustained, the corporation must not have received 50% or more of its receipts from certain passive sources.
  4. The taxpayer claiming the special treatment must be an individual (including, if certain conditions are satisfied, individuals who claim the loss through holding an interest in a partnership that is selling the stock). The special treatment isn’t available to corporations, trusts or estates.
  5. The stock must have been issued to the individual claiming the special treatment, or to the partnership through which the individual is claiming the special treatment and held continuously by that individual (or partnership) to the time of sale.