G.

CAPITAL GAINS & LOSSES

1. Definitions - No defnton n the Code for
capta assets. Ony Ordnary assets are defned
a. ORDINARY ASSETS:
(a) stock n trade of taxpayer
(b) property whch woud propery be ncuded n an nventory of the
taxpayer, f on hand
(c) merchandse nventory
(d) deprecabe assets used n the
trade/busness
(e) rea property used n trade/busness
b. CAPITAL ASSETS - property hed by
the taxpayer (whether or not connected wth
hs trade or busness)
Hence, capta assets are property of a
taxpayer other than ordnary assets.
c. NET CAPITAL GAIN - gans > oss from
saes/ exchanges of capta assets
d. NET CAPITAL LOSS - oss > gans from
saes/ exchanges of capta assets
2. Percentage taken into account
Taxpayer other than a corporaton
(Indvduas, estates and trusts)
- - 100% f the capta asset s hed for more
than 12 months
- - 50% f the capta asset s hed for ess than
12 months
- Note:
GR: for purposes of computng capta oss
and capta gan, the actual holding p!iod
s taken nto account.
Excepton: If securities become worthless
durng the taxabe year and are capta
assets, the oss resutng therefrom sha be
consdered as a oss from the sae or
exchange, on the ast day of such taxabe
year, of capta assets.
3. Limitation on Capital Loss
Aowed ony to th "tnt o# th gain$
from such saes or exchanges, hence,
the net capta oss s not deductbe.
Exampe: Gans P 5,000
Losses 15,000
NCL P10,000
In ths case, ony P5,000 can be camed as
deducton (to the extent of the gan)
E"cption: Losses from such sae ncurred
by a do%$tic ban&'t!u$t co. substanta
part of busness s recept of deposts, se
any bond, debenture, note or certfcate or
other evdence of ndebtedness ssued by
any corp, w/ nt. coupons or n regstered
form (ncudng one ssued by the
government or potca subdvson)
4. Net Capital Loss Carry-over
a. Corporatons cannot carry over a net
capta oss
b. If net capta oss s sustaned n any
taxabe yr., such oss s treated n the
succeedng taxabe yr. as a oss from the
sae/exchange of a capta asset hed for not
more than 12 mos. (100% deducton)
c. Such net capta oss that shoud be carred
over $hould not "cd th nt inco% #o!
th (a! Incu!!d )p!io! (a!*$ nt inco%+
d. Exampe: NI n 1996 = P6,000
NCL n 1996 = 10,000
treated as a oss n 1997(100%) = P6,000
ony snce t shoud not exceed the net
ncome of the taxabe yr. w/c the oss was
ncurred
Net ncome shoud be understood as
TAXABLE ncome accordng E.O. 37
5. etirement of !on"s# De$entures# Notes or
Certificates or ot%er evi"ences of
in"e$te"ness
Tax Base: A%ount !ci,d by the hoder
for such transacton
These transactons resut n capta gan or
oss athough there s no sae of capta assets
&. 'ain or Loss from (%ort (ales of Property
a. Consdered as gans & osses from
saes/exchanges of capta assets
b. Gans & Losses attrbutabe to faure to
exercse prveges or optons to buy or
se property = capta gans/osses
Note:
Short sae s a transacton n whch the seer
ses securtes whch he does not own and,
therefore, cannot hmsef suppy the securtes for
devery, n expectaton of the decne n ther
prce.
Opton to buy or se property:
Exampe: Suppose X Inc. owns rea property
worth Php 10 M. Y gves X Inc. Php 2M as opton
money for a 2-year opton perod. Before the 2
year perod ends, Y exercsed the opton and
bought the property. What w the tax treatment?
It w be sub|ect to 6% capta gans tax under
Secton 27 (D) (5). Secton 39 (F) or the provson
on the faure to exercse prvege w not appy.
Suppose the same stuaton above but Y fas to
exercse hs opton. What w be the tax
treatment?
In that case, the opton money w be a capta
gan for X and a capta oss for Y.
Note: the property sub|ect of opton need not
be a capta asset. The aw does not say f t
shoud be an ordnary or capta asset. It ony
says "attrbutabe to a property."
-. DETER.INATION O/ A.O0NT &
RECOGNITION O/ GAIN OR LOSS
1. Computation of 'ain or Loss
a. GAIN = amt. reazed > bass/ad|usted
bass for determnng gan (n other words,
seng prce or proceeds > cost)
b. LOSS = bass/ad|usted bass for
determnng oss > amt. reazed (cost >
seng prce/proceeds)
c. AMOUNT REALIZED = money receved +
far market vaue of the property (other
than money, f any) receved
.od o#
Ac1ui$ition
!asis #o! dt!%ining gain'lo$$
#!o% $al'di$po$ition o#
p!op!t(
Purchase co$t of property acqured on/after
3/1/1913
Inhertance #ai! %a!&t ,alu as of the date
of acquston (at the tme of
death)
Gft the co$t to the donor or to the
prevous owner who dd not
acqure t by gft; BUT, f such
bass > FMV at the tme of the gft,
the bass sha be such FMV for
the purpose of determnng the
oss
Acqured for
less than
adequate
consideration
a%ount paid b( th t!an$#!
f property
acqured where
G/L s not
recognzed
Sa% a$ th ba$i$ o# p!op!t(2
$toc&'$cu!iti$ "changd
(1) increased by:
dvdends
amt. of any gan
recognzed by the
exchange
(2) decreased by:
money receved
far market vaue of the
other property receved
abty assumed by the
transferee
2. )*c%ange of property
a. GENERAL R0LE: the nti! a%ount of
the gan or oss sha be recognzed upon
the sae or exchange of property
b. E3CEPTION: no gain o! lo$$ s
recognzed (tax-free exchanges)
(1) If n pursuance to a pan of %!g! o!
con$olidation
(a) a corporaton exchanges property
solely for stocks n a corp. (both
partes to merger/consodaton)
(b) sharehoder exchanges stock n a
corp. for the stock of another
corp. (both corps. are partes to
the merger/consodaton)
(c) securty hoder of a corp.
exchanges hs securtes n such
corp. soey for stock or securtes
n another corp. (both corps. are
partes to the
merger/consodaton)
(2) If property s t!an$#!!d to a co!p. b(
a p!$on n exchange for stock/unt of
partcpaton n such corp. of w/c a$ a
!$ult of such exchange such person,
aone/together w/ others, not exceedng 4
persons, gains control o# $aid co!p.
(stocks ssued for servces sha not be
consdered as ssued n return for
property)
o Contro s ownershp of stocks n a
corporaton possessng at east 51%
of the tota votng power of a
casses of stocks entted to vote.
BASIS: same as the bass of
property, stock/securtes exchanged
(a) decreased by:
money receved
far market vaue of the other
property receved
(b) ncreased by:
amount treated as dvdend
amount of any gan recognzed
by the exchange property receved as boot sha have
the FMV as bass
f part of the consderaton to the
transferor, the transferee of property
assumes a abty of the
transferor/acqures from the atter
property sub|ect to a abty, such
assumpton sha be treated as
money receved by the transferor on
the exchange
f transferor receves severa knds of
stock/securtes, Commssoner s
authorzed to aocate the bass
among the severa casses of
stocks/securtes
bass of the prop. transferred n the
hands of the transferee: same as
woud be n the hands of the
transferor ncreased by the amt. of
the gan recognzed to the transferor
on the transfer
Not:
- Transferors bass s Secton 40 (C) (5) (a)
whe transferees bass s Secton 40 (C) (5)
(b).
- Boot s any cash or property gven n
addton to the shares of stock receved by a
transferor n a tax-free exchange.
- When there s no boot, the bass s the
transferors property gven up because the
rues provded that the bass woud be the
same bass as the property gven up by the
transferor. In ths knd of transacton, the rue
s aways the transferors bass.
- When there s boot, the bass s the same
as transferors bass mnus boot ncreased by
the recognzed gan.