CHAPTER 6: CAPITAL GAINS TAXATON

CLASSIFICATION OF TAXPAYER'S PROPERTIES

1. ORDINARY ASSETS- assets used in business
a. Asset held for sale such as inventory
b. Asset held for use such as supplies and items of property plant and equipment like
buildings, improvements and equipment.
2. CAPITAL ASSETS- any asset rather than ordinary asset
(1.) Personal (non-business) assets of individual taxpayer
(2.) Business assets of any taxpayers which are:
a. Financial assets such as receivables, prepaid expenses and investments.
b. Intangible assets such as patent, copyrights, leasehold rights; franchise rights.
Note: A domestic stock is an ordinary asset to a dealer in securities but is a capital asset to a non
security dealer.
TYPES OF GAINS ON DEALINGS IN PROPERTIES

ORDINARY GAIN Arises from the sale, exchange and other

(Regular income tax) disposition inchuding pacto de recto sales and
other conditional sales of ordinary assets
CAPITAL GAIN Arises from the sale, exchange and other
(General rule: Regular income tax disposition including pacto de recto sales and
Exception rule: Capital gains tax) other conditional sales of capital assets.

CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX Tax rates

1. Capital gains on the sales of domesticstocks sold directly to buye. 1. 15% capital gains tax
2. Capital gains on the sale of real properties not used in business. 2. 6% capital gains tax

Note: The TRAIN LAW changed the two-tiered tax structures (5% and 10%) capital gains tax to
a flat 15% tax effectively January 1,2018.

TAX ON SALE OF DOMESTICSTOCKSTHROUGH THE PSE

*The sale of domestic stocks classified as capital assets through PSE is Total selling price of stock
not subject to capital gains tax. It is subject to stock transaction tax through the PSE XTransaction tax
rate = Transaction tax
of 60% of 1% of the selling price effective January 1. 2018.
THE CAPITAL GAINS TAX RATE

TAX RATES
NIRC (OLD LAW) TRAIN LAW
NET GAIN UP TO 5%
100.000
EXCESS NET GAIN 10% 15%
ABOVE 100,000
Note: a. Foreign corporation- 5%& 10% CGT
b. Individuals and domestic corporations- 15% CGT
TRANSACTIONAL CAPITAL GAINS TAX

Capital gains or losses are reacquired to be reported after each sale, exchange, and other
disposition through the capital gains tax return.
DEADLINE OF THE TRANSACTIONAL CAPITALL GAINS TAX RETURN

CGT retum shall be filed within 30 days after each sale, exchange and other disposition
of stock. If the stock is qualified for payment under the installment method, the tax is due
within 30 days after each installment.
ANNUAL CAPITAL GAINS TAX FOR OTHER TAXPAYERS

The change to a 15% flat rate would mean 159% CGT when the transaction resulted to a
gain but would also instantly mean 15% CGT refundable when the transaction resulted to
a loss.

Selling price
INSTALLMENT PAYMENT OF CAPITAL GAINS TAX
Less: cost of shares sold
When domestic stock is sold in install1ment, the capital gains
capital gain
tax may also be paid in installments if the:
Multiply by: CGT rate
a. Selling price exceeds 1,000 and
b. Initial payment does not exceed 25% of the selling price. = net capital gains tax due

SPECLAL TAXRULES IN CAPITAL GAIN OR LOSS MEASUREMENT

1. Wash sales- 61l day period

2. Tax-free exchanges
a. Exchange of stocks pursuant toa merger or consolidation
b. Transfer of stock resulting in corporate control
SALE, EXCHANGE AND OTHER DISPOSITION OF REAL PROPERTY CLASSIFIED
AS CAPITAL ASSET LOCATED IN THE PHILIPINES
Under the NIRC, the fair value of real property is whichever is higher of the:
A. Zonal value- value prescribed by the Commissioner of Internal Revenue
B. Fair market value- schedule of market values of the provincial and city accessors.

SCOPEAND APPLICABILITY OF THE 6% CAPITAL GAINS TAX

Location of the property Taxpayers

Individuals Corporations
Within the Philippines All individuals Domestic corporation only
Not applicable Not applicable
Outside the Philippines

EXCEPTIONS TO THE 6% CAPITAL GAINS TAX

1. Alternative taxation rule
Individual of real property capital assets has the option to be taxed of:
a. 6% capital gains tax or
b. Regular incone tax
2. Exemption rules
a. Exenption under the NIRC
b. Exemption under special laws

Exemption under the NIRC Sale, exchange and other disposition of a

principal residence for the reacquisition of a
new principal residence bi individual
taxpayer
Exemption under the special laws 1. Sale of land pursuant to the
comprehensive Agrarian reform
program.
2. Sale of socialized housing units by
the national housing authority.

COMPARISON OF THE 6% CGTAND 15% CGT

15% CGT
6% CGT
Gain on sale of stocks
Tax object Gain on real property
Basis of the tax Presumed gain Actual gain
Nature of the tax Final tax Self-assessed tax
Transactional and annual tax
Frequency of payment Per transaction
 CHAPTER 6 Capital Galns Taxation

Classification of taxpayer's properties.

1. Ordinary Asset- asset used in business such as:
a. Stock in trade or other real property ofa kind which would properly include in the
inventory.
b. Real property primarily for sale to customer in the ordinary course of business of his
trade or business.
C. Real property used in trade or business of a character which is subject to depreciation.
d. Real property used in trade or business of the taxpayer
/ Basically ordinary asset are:
o Asset held for sale - such as inventory
Asset held for use - such as supplies and items of property, plant and equipment like
building, property improvement, and equipment.
2. Capital Asset - any asset other than ordinary assets.
Basically, capital asset are:
Personal (non-business) asset of individual taxpayer.
o Business assets of any taxpayer which are:
Financial assets - such as cash, receivables, prepaid expenses, and investment
Intangible asset - such as patent, copy rights, leasehold rights, and franchise
rights.
Asset classification is relative

Classification of assets or property as ordinary asset or capital asset depends upon the nature of
taxpayer's business and its usage by the business.
Asset Classification Rules.

1. Asset purchased for future used is an ordinary asset.

2. Discontinuance of the active use of the property does not change its character previously
established as a business property.
3 Real property used, being used, or have been previously used is an ordinary asset.
4 Not being used in business, as ordinary asset being used in business, after 2 years automatically
converted into capital asset.
Adepreciable asset is an ordinary asset.
6. Real properties used by an exempt corporation in its exe mpt operation is a capital asset.
7. The classification of property shall depend whether or not the acquirer uses it in business.
Types of gains on dealing in properties.

1. Ordinary gain- arises from sale, exchange and other disposition including pacto de retro sales
and other conditional sale of ordinary asset.
2. Capital gain - arises from sale, exchange and other disposition including pacto de recto
sales and
other conditional sale of capital asset.
Capital Gain Subject to Capital Gains Tax.
there are only two types of capital gain subject to capital gains tax.
1. Capital gain on the sale of domestic stocks sold directly to the buyer.
2. Capital gain on the sale of real properties not used in business.
Scope of Capital Gain Tax.

Gain on dealings in capital asset Tax rates

Gain on the sale, exchange, other 15% capital gains tax
disposition of domestic stocks directly to
buyer.
Sale, exchange, and other disposition of 6% capital gains tax
real property in the Philippines
V Gains from other capital asset Regular income tax

Capital Gain on the Sale, Exchange, Other Disposition of Domestic Stocks Directly to Buyer.
Domestic stocks
domestic stocks are evidence of ownership or rights to ownership in domestic corporation regardless of
its features, such as;
1. Preferred stocks (participative, cumulative, etc.)
Common stocks
3. Stocks rights
4. Stock option
5 Stock warrants
6 Unit of participation in any association, recreation, or amusement club (golf, polo, or similar
club)
Capital gain in exchange of domestic stocks in kind and other disposition such as;
1. Forecosure of properties in settlement of debt.
2. Pacto de retro sale - sales with but back agreement.
3. Conditional sales- sales which will be perfected upon completion of a certain specified
condition.
4. voluntary buy back of shares by the issuing corporation - redemption of share which may be
reissued and not intended for cancellation

the term other disposition does not include;

1. Issuance of stocks by corporation financial transaction not a sale transaction
2. Exchange of stocks for services. - no gain or loss can be imputed
3. Redemption of share in a mutual fund. - exempted by the NIRC from income taxation
4. Worthlessness of stocks. - regular income tax
5. Redemption of stocks for cancellation- regular income tax
6. Gratuitous transfer of stocks. - subject to transfer tax not income tax.
Mode of Disposing Domestic Stocks.
shares of stocks may be sold, exchanged, or disposed:
1. Through the Philippine Stock Exchange (PSE) or; (not subject to Capital Gains Tax)
2. Directly to the buyer.

CAPITAL GAINS TAX ON SALE, EXCHANGE, AND OTHER DISPoSITION OF DOMESTIC STOCK DIRECTLY TO
BUYER.

Nature of CGT;

1. Universal Tax. - it applies to all tax payer

2. Annual Tax. - imposed on the annual net gain

The net gain is determined as follows;

Selling Price P xxx,XXX

Less: Basis of stock disposed P xXx,XXX
Selling Expense XXX,XXX
documentary stamp tax on the sale XXX,XXX XXX,XXX
Net capital gain (loss) XXX,XXX

*Documentary stamp tax is deducted if paid by the seller

Selling price shall mean:

Total consideration received per deed of sale

Sum of money and fair value of property received
Fair value of property received.
Tax basis of stocks;

If purchase, tax basis is cost of the property

o Specific identification method
o Moving average method
o First-in first-out method
Fair value at the time of decedent
Lower at the fair value and in the hands of the donor
Amount paid
substituted basis of the stocks

THE CAPITAL GAINS TAX RATE

TAX RATE
NIRC (old law) TRAIN law
Net gain up to 100,000 5%
15%
Excess net gain above 100,000 10%
Deadline of capital gains tax return.

Within 30 days after sale, exchange, and other disposition of stocks. If installment, after 30 days of each
installment.

Deadline of annual capital gains tax return.

On or before the 15h day of the fourth month following the close of taxable year of the taxpayer