TAXATION

FAR EASTERN UNIVERSITY – MANILA

INCOME TAX (CAPITAL ASSETS AND CAPITAL GAINS AND LOSSES) (1901)
1. Capital Assets
Meaning of Capital Assets The term " capital assets" means property held by the taxpayer whether or not
connected with his trade or business
Not included in capital assets The term does not include the following (hence ordinary assets):
1. Stock in trade
2. Property of a kind which would be included in inventory of the taxpayer if on hand
at the close of the taxable year
3. Property held by the taxpayer primarily for sale to customers in the ordinary course
of trade or business
4. Personal property used in the trade or business which is subject to allowance for
depreciation
5. Real property used in business

Sale of Capital Assets Other than Real Property and Shares of Stock that are subject to a special CGT rate.

• The net capital gain realized from the sale of assets classified as capital assets shall be subject to ordinary income tax.

GENERAL RULE IN DETERMINING GAIN OR LOSS FROM SALES OR EXCHANGES OF PROPERTY

Computation of gain or loss.

Amount Realized = Sum of money received + FMV of property (other than money received)
Less basis or Adjusted Basis
Gain or loss.

Basis – General Rules

1. The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or
2. The fair market price or values as of the date of acquisition, if the same was acquired by inheritance; or
3. If the property was acquired by gift, the basis shall be the same as it would have been in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the
property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value; or
4. If the property was acquired for less than an adequate consideration in money or money’s worth, the basis of such property
is the amount paid by the transferee for the property; or
5. The basis as defined in paragraph (C) (5) of this Section, if the property was acquired in a transaction where gain or loss is
not recognized under paragraph. (c) (2) of this Section.

Ordinary Asset vs. Capital Asset

Gain (Gross Income)
Notes:
Personal Property Capital Asset
Loss (Deduction) Selling Price xxx
Less: Historical Cost (xxx)
ORDINARY Gain or (Loss) xxx/(xxx)
ASSETS
Gain (Gross Income)
Ordinary Asset
Selling Price xxx
Real Property Less: Net Book Value (xxx)
Loss (Deduction) Gain or (Loss) xxx/(xxx)
Gain (Gross Income)

Personal Property
Loss(Deductible only to
the extent of capital gain)
CAPITAL - Individual (Carry Over Loss)
ASSETS - Corporation (No Carry Over Loss)

Real Property
(Subject to CGtax)

2. Terms Associated with Capital Assets

a. Net capital gain The excess of capital gain over capital loss

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b. Net capital loss The excess of capital loss over capital gain
c. Holding Period The length of time the asset was held by the taxpayer. It covers the period from the
date of acquisition to date of sale

3. Summary of Important Points

Taxpayers other than corporation Corporations
a. Short term capital gain or loss 100% 100%
(capital asset has been held for not
more than 12 months)
b. Long term capital gain or loss 50% 100%
(capital asset has been held for more
than 12 months)
c. Limitation on deduction of Capital losses shall be allowed only to Capital losses shall be allowed only to
capital losses the extent of capital gains the extent of capital gains
d. Net Capital loss carry over Net capital loss is carried over to the Capital loss carry over is not allowed
succeeding year as a short term loss
(100%)

Amount to be carried over is the lower

between the net capital loss and net
income in the year the loss was
sustained

4. General professional partnership

Accounting for capital gains and losses of Capital gains or losses of the general professional partnership will be
general professional partnership accounted for by the partners in proportion to their interest in the
partnership

5. Sales of Capital Assets Which are subject to Capital Gains Tax (Final Tax)
a. Sale of shares of stock not traded in the local stock exchange (5% and 10% based on net capital gains)
b. Sales, barter, transfer and/or assignment of shares of stock of publicly-listed companies not compliant with mandatory
minimum public ownership (10% of the publicly-listed companies issued and outstanding, exclusive of any treasury shares)
RR No. 16-2012 (5% and 10% based on net capital gains)
c. Sale of real property classified as capital asset (6% based on selling price or FMV whichever is higher)

6. Transaction resulting in capital losses or gains even if there is no sale or exchange of capital assets
a. Worthless shares of stock
b. Worthless of bonds
c. Retirement of bonds
d. Short sales of property
If shares of stock become worthless during the taxable year and are capital
assets, the loss shall be considered as a loss from the sale or exchange of
capital assets on the last day of such taxable year.
If bonds, debentures, or other evidence of indebtedness of any corporation
(including those issued by the Government) are ascertained to be worthless
and charged off within the taxable year and are capital assets, the loss shall be
considered as a loss from the sale or exchange of capital asset on the last day
of such taxable year.
Amount received by the holder upon the retirement of bonds, debentures or
other evidence of indebtedness issued by any corporation (including those
issued by the government) with interest coupon or in registered form, shall be
considered as amounts in exchange thereof.
Gain or losses from short sales of property shall be considered as gains or
losses from sales or exchanges of capital assets.

e. Option gains or losses
f. Liquidating dividends
g. Liquidating partnership
2. DONOR’S TAX
Short sales- a transaction in which a speculator sells securities, which he does not own in
anticipation of a decline in its price.
Gain or losses on account of failure to exercise a privilege or options to buy or
sell property are considered as capital gain or losses as the case may be.
When a corporation distributes all of its assets in complete liquidation, the gain
or loss sustained by the stockholder, whether individual or corporate, is capital
gain or losses as the case may be.
When a partner retires or the partnership is dissolved, he realizes gain or loss
as follows:
Amount received for his interest xxx
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 Less: Investment (xxx)
Share in the undistributed partnership income
which has been reported as income (xxx)
Gain (loss) xxx/(xxx)

PROBLEMS
Problem 1: (Classify the following into Capital Asset or Ordinary Asset)
Classification
1. Accounts receivable
2. Securities held as investment
3. Interest of a partner in a partnership
4. Apartment house
5. Inventories of raw materials, work in process and finished goods
6. Office equipment
7. Land used in business
8. Land for sale by a real estate dealer
9. Residential house and lot
10. Car for personal use

Problem 2: Mr. Francis Gomez reported the following incomes and losses for the calendar year 200B:
Income:
Professional Fees P180,000
Interest on notes receivable (professional) 12,000
Winnings in a raffle 10,000
Dividend income 6,000
Capital gain (loss) on sale of capital assets:
Residential land 50,000
Personal car 10,000
Jewelry 30,000
Refrigerator (4 000)
Loss on sale of personal furniture to his brother (6,000)

The following tabulations are the particulars on the capital assets sold in 200B:
Capital Assets Date Sold Date Purchased Selling Price Cost
Residential land 2-15-200B 12-20-200A P130,000 P80,000
Personal car 1-15-200B 11-25-200A 105,0000 95,000
Jewelry 7-10-200B 5-12-199Y 80,000 50,000
Refrigerator 9-20-200B 7-15-199X 4,000 8,000
Furniture 9-30-200B 10-30-200B 10,000 16,000

Required: Compute the amount of the net capital gain of Mr. Gomez that shall be reported in the 200B income tax return.

Problem 3: The following data are available from the records of ABC Corporation:
Year 4 Year 5 Year 6 Year 7 Year 8
Business Income P300,000 P400,000 P500,000 P600,000 P700,000
Business Expense 340,000 380,000 450,000 570,000 650,000
Capital gain (loss)
Short-term 50,000 (40,000) 30,000 30,000 (40,000)
Long-term (40,000) 10,000 (100,000) 10,000 70,000

Required: Compute the taxable income ___________________

4. A single taxpayer has the following income, expenses and transactions in 20X9:

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 Gross income P750,000
Business expenses 225,000
Health insurance premium paid 2,000
Selling price, partnership interest (investment in 20X4 was P60,000) 180,000
Gain on sale of personal car held for 3 years 30,000
Loss on sale of Jewelry for personal use held for 6 months 15,000
Loss on account of failure to exercise two-month option to buy 12,000
Liquidating dividend (investment in 20X6, P300,000) 240,000
Gain on short sales 6,000
Required:
1. How much is the net capital gain (loss)?
2. How much is taxable net income?

2. DONOR’S TAX Page 4 of 4