Lesson 4
Capital Gains Taxation
Types of Assets
o The assets of the business are classified as:
✓ Ordinary assets – includes:
a. stock in trade of the taxpayer, or other property of a kind
which would properly be included in an inventory of the
taxpayer if on hand at the end of the taxable year
b. properties held by the taxpayer primarily for sale to
customers in the ordinary course of trade or business;
c. properties used in trade or business of a character which is
subject to allowance for depreciation; and
d. real properties used in trade or business
Examples: inventories, property, plant and equipment
✓ Capital assets – any other assets that does not fall under
the definition of ordinary assets
Examples: investment properties, notes receivables and
investment in equity or debt securities (for a non-security
dealer taxpayer)
NOTE: Gains arising from sale of ordinary assets are called “ordinary
gains.” Gains arising from sale of capital assets are called “capital
gains.” All ordinary gains are taxable under regular income taxation.
Capital gains are taxable either under final tax or under regular income
tax.
Capital Gains Subject to Final Tax
A. Capital gains tax on sale, barter, exchange and other disposition of
domestic shares of stock directly to buyer
o Requisites:
a. There is a net gain.
b. The capital asset sold is a domestic stock.
c. The sale is made directly to buyer.
o Capital Gains Tax Rates: 15%
o Note: This rule on capital gains on sale of domestic stocks
directly to buyer is uniform to all income taxpayers (individuals
or corporate) regardless of classification. The rule does not
apply to:
1. Gains on sale shares of stock is that is traded in the
Philippine Stock Exchange (PSE) - This is subject to a
transaction tax (percentage tax) of 60% of 1% of selling
price.
2. Gains under similar conditions by security brokers or dealers
o When to file the Capital Gains Tax Returns?
1. Per transaction basis: Within 30 days after each transaction
2. Annual basis:
a. For individuals – On or before April 15 of the following
year
b. For corporations – On or before the 15th day of the fourth
month following the close of the taxable year
o When to pay the capital gains tax?
1. Lump sum – Upon date of filing the return with the Bureau
(within 30 days from date of sale)
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Lesson 4
Capital Gains Taxation
2. Installment – tax on installments is due within 30 days from
receipts of each installment
o Documentary Stamp Tax
✓ Par value stock: P1.50/P200 or fractional part of the par value
of due bill, certificate of obligation or stock
✓ No-par stock: 25% of the documentary stamp tax paid on the
original issue of said stock. (The documentary stock on
original issue of non-par stock is based on actual
consideration for the issuance – Sec. 174 NIRC)
✓ Limit: Only one tax shall be collected on each sale or transfer
of stock or securities from one person to another regardless
of whether or not a certificate of stock is issued or obligation
is issued, indorsed, or delivered in pursuance of such sale or
transfer.
✓ Deadline: Documentary stamp tax return shall be filed within
10 days after the close of the month when the taxable document
was made, signed, issued, accepted or transferred, and the tax
thereon shall be paid at the same time the return is paid.
B. Sale, exchange or other disposition of real property in the
Philippines classified as capital asset
o Requisites:
a. The real property is located in the Philippines.
b. The property is classified as capital asset.
c. The taxpayer is an individual or a domestic corporation.
d. The taxpayer is other than a foreign corporation.
o Tax Rate and Tax Basis: 6% x (the higher of Gross Selling Price
or Fair Market Value)
✓ The fair market value for purposes of the capital gains tax
is whichever is higher of:
1. Zonal value as prescribed by the Commissioner of Internal
Revenue
2. Assessed value as determined by the Provincial or City
Assessor’s Office
✓ Gross selling price – The amount of any money received plus
the fair market value of any property received. Interest on
the selling price shall be treated separately as Other Income
taxable under regular income taxation.
✓ Excess Mortgage Assumed - The excess of the mortgage assumed
over the cost of the property is included both in initial
payment and selling since it is a constructive receipt of
income; in other words, it represents “extra consideration”.
Note: The basis of the tax is on the gross selling price or gross fair
market value. This treatment presumes the existence of gain and is applied
regardless of the existence of actual gain.
Scope of Capital Gains Tax
Individuals Corporations
Location of
Citizen Alien
the Real Non-
Non- NRA- NRA- Domestic Resident
Property Resident Resident resident
resident ETB NETB
Philippines ✓ ✓ ✓ ✓ ✓ ✓ Not Applicable
Abroad × × × × × × × ×
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Lesson 4
Capital Gains Taxation
Note: Regular income taxation, being the general rule, applies where the
6% final capital gains tax do not apply. Under regular taxation, the actual
net gain is subject to regular income tax.
o How is the capital gains tax paid?
1. The tax is withheld at source – the seller and buyer files a
joint capital gains tax return (one return per sale or
foreclosure sale).
2. Installment (one return for each installment payment receive)
- The tax is withheld at source in installments when the
taxpayer qualifies and opted to be taxed on installments.
o Alternative Taxation: The actual net gain on the sale of real
property may be included under progressive income taxation.
✓ Requisites:
a. the seller is an individual
b. the buyer is the government, its political subdivisions or
agencies or GOCCs
o Tax Exemption: The sale may be exempted from the payment of capital
gains tax provided the following conditions are met:
1. The seller is an individual citizen or resident alien.
2. The real property sold is his principal residence.
▪ Principal Residence – the place where an individual person
resides comprising of the house and the lot to where it
erects; in case the interest on the land component is held
by other persons, only the dwelling house is considered
principal residence. The residential address indicated in
the latest income tax return immediately before the date of
sale is conclusive presumed to be the true residence. The
Barangay Captain Certification or Building Administrator
Certification in the case of condominium residences is no
longer honored.
3. The full proceed of the sale is utilized in acquiring another
residence.
4. A new residence must be acquired or constructed within 18
calendar months from the date of sale.
5. The BIR is duly notified by the taxpayer of his intention to
avail of the tax exemption within 30 days from the date of sale
through a prescribed return.
6. The capital gains tax thereon is held in escrow in favor of the
government.
7. The exemption can only be availed once every 10 years.
8. The historical cost or adjusted basis of the real property
(principal residence) sold shall be carried over to the new
principal residence built or acquired Should there be any
portion of the proceeds of sale not utilized for the
reconstruction of a new residence, the same shall be taxable.
The tax on the unutilized portion shall be determined as
follows:
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Lesson 4
Capital Gains Taxation
o Tax Basis of New Principal Residence:
✓ Tax Basis refers to the cost or adjusted cost of a property for
tax purposes and hence the amount deductible for tax purposes in
determining gain or losses in disposal of the related property
if the related transaction is taxable under the progressive
system of taxation. Generally, when a property is acquired by
purchase, the cost is the tax basis.
✓ A tax basis reduction may result if the proceeds of the
disposition of a principal residence is not fully utilized in
the acquisition or construction of a replacement. Likewise, a
tax basis increase results when additional expenditures were
incurred by the taxpayer in securing a replacement principal
residence.
o Documentary Stamp Tax
1. Amount:
✓ P15 – if selling price after allowance for encumbrances
does not exceed P1,000
✓ P15 – for each P1,000 or fractional excess above P1,000
of such selling price
2. Deadline: Documentary stamp tax return shall be filed and the
tax thereon paid within 10 days after the close of the month when
the taxable document was made, signed, issued, accepted or
transferred.
