Legal Definitions - blockage rule

The blockage rule is a principle in taxation that states that a large block of stock shares may be valued at less than the total value of the individual shares. This is because such a large block may be difficult to sell at full price.

For example, let's say that an individual owns 10% of a company's stock, which is worth $1 million in total. However, if that individual were to try to sell all of their shares at once, they may have difficulty finding a buyer willing to pay the full $1 million. Therefore, the blockage rule allows for the value of the shares to be adjusted to reflect the difficulty in selling such a large block.

The blockage rule is important in determining the fair market value of large blocks of stock for tax purposes. It recognizes that the value of a large block of stock may be different from the value of the same number of individual shares, due to the difficulty in finding a buyer for such a large block.