Quick Look (Capital Gains Tax)

Taxation Law Review
Quick Look (Capital Gains and Losses)

Note: 72 Bar Questions from 1991 to 2014 (by Dean Ceballos)
Realization Test 1. Return of capital is not included in the net income. Only income or fruits of the capital is included. In this case, capital is totally excluded in order to determine any form
of income.
2. There will only be taxable income if the gain is separated from the capital. In order to be taxed, it must be separated from property it is derived from.
a. There must be a Tax Event that triggers the transfer of ownership of property. This tax event may be an exchange transaction.
3. Income from sale of capital assets is a type of taxable income. However, it is not included in the determination of taxable income for purposes of Income Tax because it
is subject to a different tax rate.
a. However, it applies the same principles. Thus, CGT is only due and payable when a gain is realized, not while the property is with the taxpayer.
b. Properties held by the taxpayer may increase in value every year, however he does not become liable for CGT until these are sold.
Economic-Benefit Based on the Realization Test, revaluation increment or revaluation of property through appraisal which shows a higher value than the value assessed before is not taxable
Principle income. The difference between the assessed value and the actual cost of property needs a taxable event first.
: However, if the increase value is used to compute for depreciation expense, once the deprecation is considered, the original and acquisition cost becomes subject to tax
because of the Economic-Benefit Principle.
1. Under the Economic-Benefit Principle, the increase in the net worth becomes taxable regardless of whatever form the increase or benefit is given.
2. In this case, the benefit was in the form of applying the depreciation. When you deduct the depreciation expense, you benefit from the deduction because it is no longer
included in the taxable income. Thus, once you sell or reevaluate it, the gain you acquire (through the difference between the original and acquisition-assessed cost) is
taxable.
3. This is an example of an unrealized income that may be recognized.
Types of Income Net income Gross income Taxable income

Definition It is all wealth which flows to the taxpayer, It is all income, gains or profit These are the gross income specified in the NIRC, less the following under
other than mere return of capital. Hence, that are subject to income tax this Code or under other special laws:
income is the excess after the capital has under SEC 31 and 32. 1. Deductions
been returned. 2. Personal and additional exemptions
Following the Realization Test, we follow this format in the reviewer:

1. Return of Capital
2. Taxable Event
3. Taxable Income
4. Tax Implications
When it is Capital assets are assets not considered as ordinary assets, whether or not these are connected with trade or business.
considered Capital asset Ordinary asset
Capital (asset) Determination 1. Property is not actually used in trade or business 1. Stock in trade or other property of a kind which would be
of the taxpayer. included in the inventory at the close of the taxable year.
2. It is not held for lease or sale to customers. 2. Property held for sale in the ordinary course of his trade or
3. It is only held for investment purposes, even if it business.
became vacant and idle. It does not become part 3. Property used in trade or business subject to allowance for
of inventory for sale or lease and is not actually depreciation.
used in business. 4. Real property used in trade or business.
Real property Taxability on gain Final tax on gain (6% CGT) Ordinary income tax on gain, if forming part of inventory or
primarily held for sale.
Undergrad Notes (Dizon and MemAid 2016), Past Bar Exams, Atty. Lock (Legal Edge) Updates, SC Cases 2005-2017, VIP and notes to 1
check by Lee Anne Yabut
Depreciability Depreciation as a deduction applies only to Ordinary assets Subject to depreciation to determine how much the value has been
because there are no rules on deduction pertaining to used up and to match the portion of cost that relates to revenue.
Capital Assets, only NELCO. 1. It is still an ordinary asset even if it is not depreciated.
2. It is still an ordinary asset even if it is fully-depreciated.
: Land
Deductibility of It is not deductible from gross income. Instead, it is off-set It is deductible from gross income.
loss against capital gains.
Personal property Determination 1. Everything a taxpayer owns and uses for personal These are used in business, trade or profession.
purposes or pleasure. Those held for sale.
2. Investment property such as stocks and bonds,
except if it is rented out.
Taxability on gain Final tax on gain (6% CGT) Ordinary income tax on gain, if forming part of inventory or
primarily held for sale.
Deductibility of It is not deductible from gross income from trade, business or It is deductible.
loss profession.
Notes on Capital Assets:

Capital assets are properties held by the taxpayer owned and used for personal purposes, pleasure or investment.
1. “For personal use”
a. Property held for personal use is a capital asset.
i. If held for personal use or investment, both are considered capital.
If he held the item for investment If he owned the item for personal use
Examples Gold or silver bullion, coins or gems Car, refrigerator, furniture, stereo, jewelry
Implications Any gain is taxable as a capital gain (income tax). Gain is taxable as a capital gain (income tax)
Loss can be deducted as a capital loss. Loss cannot be deducted.
ii. Since it is not even included in any form of income, it does not enjoy exemptions and allowable deductions:
1. Examples:
a. He cannot claim for deduction on depreciation expenses against his gross income.
b. If the property is used partly for business and partly for personal uses, he can only deduct depreciation based on business or
investment use.
c. If he converts property from personal use to business use, he can begin to depreciate it from the time he converted the use.
2. “For investment”
a. Investment property such as stocks and bonds is by nature a capital asset. This treatment does not apply to property used as income.
b. Securities would be ordinary assets only to a dealer or trader for his own account. If another person holds the shares by invested, it becomes capital assets.
Securities as ordinary assets Capital
Definition If assets are held by a dealer or trader. If held by another who holds it by investment.
i. Instances when a person disposes or exchanges a capital for another capital.

1. GR: An exchange is taxable because there is a gain based on difference of values.
a. The exchange is taxable because there is a gain based on difference of values.
i. The exchange is regarded as if the transferor of property is paid in cash (equivalent to the value of stocks) and the
transferor of stocks is also paid in cash (equivalent to the value of property). Here, gain or loss is computed by
determining the difference between the value of stocks and the cost of property in consideration.
2. : If the purpose is not for gain but for investment purposes, the exchanged property still remains to be capital.
Notes on Ordinary Assets:
1. Importance in determining whether an asset is Ordinary or Capital:
a. Net capital gains are subject to a different tax rate compared to ordinary income (CGT).
b. Net capital loss has limitations in deductibility and carrying-over. They are also subject to holding period and percentage taken into account for purposes of
computing taxable income
2. The following are not capital assets:

a. Stock in trade or property included in inventory
b. Stock in trade, inventory and other property of taxpayer mainly for sale in trade or business
c. Accounts or notes receivable acquired in ordinary course of trade or business
d. Depreciable property used in trade or business or as rental property, even if the property is fully depreciated or amortized.
e. Rental property used in trade or business (other than land)
f. Land used in business
3. “Included in inventory”
a. This immediately presupposes Ordinary asset because inventories are resorted to where production, purchase or sale of merchandise is an income producing
factor.
b. Inventory is the detailed list of articles of property and other assets. Only merchandise title to which is vested in the taxpayer should be included in his inventory.
4. The following are capital transactions:

a. Short sales
b. Retirement of bonds, debentures, notes or certificates or other evidences of indebtedness.
c. Securities becoming worthless.
d. Failure to exercise option to buy or sell property.
e. Distribution in liquidation of corporations
f. Readjustment of interest in GPP
Taxable Event 1. There must be a tax event that triggers the transfer of ownership of property in order to acquire income.
a. There must be an exchange transaction which results to acquiring assets or services, or satisfying liabilities by surrendering other assets.
b. The property must be disposed or alienated in exchange for proceeds.
c. Examples of tax event:
i. Sale or exchange
ii. Compensation for services
iii. Receipt of passive income
2. Theory of Fragmentation: Each asset is treated to be transacted in separate sales in order to determine gain or loss for each.
a. Sale of a business is not a sale of a capital or ordinary asset. Instead, all the assets of the business are sold.
i. When the business sells all its sales, it is considered to be in liquidation because it ceases to exist upon disposition of all its assets. Thus, each gain or loss
arising from the separate sales are considered capital gains or loss.
Sale of domestic shares Sale of domestic shares when the corporation is in liquidation Sale of all other assets when the
corporation is in liquidation
Taxability Net capital gain on sale of domestic When the corporation was dissolve and its shareholders surrender their This is not considered a sale.
shares not listed and traded in stock stock to it and it paid sums to them in exchange, it is the same as a sale It is exempt from income taxes,
exchange is subject to CGT of 5% or of the same stock to a third party who paid for it. Thus, even though it is creditable withholding and DST.
10%. a capital loss or capital gain, it is subject to income tax.
b. Sale of property in parts result to separate determination of gains and losses proportionate to the parts sold.
i. Each part sold is a separate transaction from the others. Thus, the gain or loss is computed at the time each part is sold. Computation shall not be
delayed until all parts have been disposed of.
ii. The gain or loss on the part sold is the difference between the selling or exchange price and the cost or other basis allocated to each part.
3. Non-Recognition Rule states, “if a taxpayer disposes his property but continues to use it as an investment, only in another form, it cannot be considered income”.
i. It still continues to be a capital asset because there is still no Tax Event. There is no gain, or recognition of gain is delayed for another time until the new
(exchanged) property is disposed for gain.
ii. There is a continuity of interest.
1. Examples of Non-Recognition Rule:
a. Involuntary conversions of property are not subject to tax if the property is replaced.
b. Tax-free exchanges under Sec 40(c2):
i. Transfer to a controlled corporation
ii. Merger or consolidation
Transfer to a controlled corporation Merger or consolidation
Situation There is no gain or loss if the property is transferred to a corporation by There is no gain or loss if because of the merger or consolidation:
contemplated a person in exchange for stock or unit of participation of which the 1. A corporation exchanges property solely for stock in another
person gains control of the corporation. corporation which is a party to the merger.
2. A shareholder exchanges stock in a corporation-party to a merger, for
Person who transfers the property may transfer it on his own or with the stock of the other corporation.
others as long as they do not exceed 4 persons. 3. A security holder exchanges his securities in a corporation-party to a
merger, for the stock of the other corporation.
Effect The property owner maintains control over the property because he
maintained control over the corporation which maintains the property.
iii. : This does not apply to non-stock, non-profit corporations because it deals with Mergers or Consolidations of stock corporations.
4. Involuntary Conversion Doctrine: if the taxpayer uses the entire insurance proceeds in rehabilitating or replacing destroyed assets, excess proceeds (compered to net book
value of damages) are not considered realized income.
a. This is because of the Rule that if insurance proceeds are reinvested in the same property, no gain is recognized.
i. Not subject to Income Tax.
ii. Not considered a deductible loss but capitalized due to depreciation.
iii. Not subject to VAT; Indemnification cannot be considered a sale because it arises only due to a fortuitous event.
3. Securities:
a. Event of securities becoming worthless is the exception to the rule that there must be a taxable event (sale or exchange) to determine a gain or a loss.
i. When securities become worthless, the law deems it to be a loss even if there is strictly no sale or exchange. Loss is a capital loss as if it was incurred
from a Tax Event.
ii. This also applies to retirement of certificates of indebtedness, short sales, options to buy or sell property.
b. Shrinkage of value of stocks through fluctuation of market is not enough to deduct the value as a loss from gross income.
i. Just like appreciation or increase of value of capital, it is not considered a Tax Event on its own. Rather, it needs a Tax Event or an actual exchange in
order to determine loss or gain.
ii. If the stock becomes worthless, it is considered an ordinary loss which may be deducted from gross income. Note that the Rule here is different as when
securities become worthless. In case of Worthless securities, losses are considered capital losses deducted from the capital gain and not from the gross
income.
4. Sale of inventory results in ordinary income or loss and not of capital gain or loss.
a. This is because, inventory presupposes Ordinary Assets and not Capital Assets.
Taxable Income Capital asset Ordinary asset

or
Determination Determination 1. Property is not actually used in trade or business of the taxpayer. 1. Stock in trade or other property of a kind which would be
of Gain or Loss 2. It is not held for lease or sale to customers. included in the inventory at the close of the taxable year.
3. It is only held for investment purposes, even if it became vacant and 2. Property held for sale in the ordinary course of his trade or
idle. It does not become part of inventory for sale or lease and is not business.
actually used in business. 3. Property used in trade or business subject to allowance for
depreciation.
4. Real property used in trade or business.
Gross income It is not excluded from determination of Gross Income or any form of income. It is included in Gross Income as Dealings in Property.
Taxable event or Transaction should not be part of the typical, day-to-day operations of the firm. Sale is in the ordinary course of trade or business.
sale and exchange
Common Notes:
1. The following items are not included in the computation of Gross Income subject to Income Tax on Graduated Rates because of one or a combination of the following
reasons:
a. They represent return of capital, or are not income, gain or profit.
b. They are subject to another kind of internal revenue tax.
c. They are income, gain or profit but are express exempt from income tax by the Constitution, Tax Treaty, Tax Code or General or Special law
2. Securities are shares of stock in a corporation. This includes bonds, debentures, notes or certificates, or other evidences of indebtedness issued by the corporation.
a. Note these are losses or what the taxpayer owes to another, not what is credited to it.
b. These are divided into debt securities and equities:
Debt securities Equities
Definition It represents money that is borrowed but must be repaid. These include government It is capital asset of which sale may result to capital loss or gain. If there
and corporate bonds, certificates of deposit, preferred stock and collateralized is a loss sustained by the holder, this will be treated as capital loss.
securities.
Classification Dealings with Property Capital asset
Provision Found in Bad Debts Found in Capital losses
Notes Applicable to Ordinary Income:

1. Basis for determining gain or loss from sale or disposition of property:
If property was acquired on or after March 1, 1912 by purchase Cost
If acquired by inheritance FMV or value as of the date of acquisition.
If acquired by donation Same as if it would be in the hands of the donor or last preceding owner, except if such basis is
greater than FMV of property at the time of the gift, the basis shall be the FMV for purpose of
determining the loss.
If acquired for less than an adequate consideration in money or money’s worth Amount paid by the transferee
If acquired for more than an adequate consideration It is considered a gift
2. Amount realized and adjusted cost:

a. Gain from sale or other disposition of property shall be the excess of amount realized from the sale over the basis or adjusted basis.
b. Amount realized shall be the sum received + FMV of the property (other than money) received.
3. Gain from Dealings in Property (Ordinary Assets) are included in the Gross Income subject to Graduated Rates.
a. Sale of bonds, debentures and other certificate of indebtedness:
b. Note: these are assets or bonds that is credited to the taxpayer.
Gains from capital assets Gains from sale, exchange or retirement of bonds etc. Interest from sale of bonds etc.
Taxability To be excluded from gross income, maturity of Maturity must be less than 5 years in order to be Included in gross income; not exempt.
bonds, debentures and other certificates of included in gross income.
indebtedness must be more than 5 years.
Classification or Capital assets These are considered “Dealings in Property” under These are within category of Interests.
rationale category of Gains.
4. Gain or loss from sale of goodwill results only when business or part of the business, to which the goodwill attaches, is sold.
5. Sale of patents or copyrights:
a. If the taxpayer sells the patents or copyrights, he must determine the profit or loss because computing for the difference between the selling price and the cost.
b. After profit or loss is ascertained, it could then be further increased or decreased because of depreciation since the date of acquisition.
Gains Capital asset Ordinary asset

sale and exchange
Taxable income of It is not part of taxable income for Graduated Rates but it is a gain from capital, It is part of taxable income under Graduated Rates.
Capital Gains hence, subject to CGT.
Notes on Gains from Capital Assets:

Type of capital gain CGT Rate
Shares of stock not traded through a local stock exchange 10%, if over 100,000
5%, if over 100,000
Disposition of real property held as capital 6% on gross selling price or current FMV
Resident Citizens, Type of capital gain CGT Rate

Non-Resident Shares of stock not traded through a local stock exchange 10%, if over 100,000
Citizens and 5%, if over 100,000
Resident Aliens Disposition of real property held as capital 6% on gross selling price or current FMV
Shares of Stock not traded through a local stock exchange:

1. The tax is upon the net capital gains realized from the disposition of shares.
a. This does not include shares sold or disposed through the Local Stock Exchange because this is subject to stock transaction tax.
b. Local Stock Exchange refers to any domestic organization that provides a market place.
2. The law speaks of net capital gains. Hence, it must take into account all transactions including capital losses to arrive at the taxable gain.
a. For individual, all transactions during the calendar year.
b. For corporate taxpayers, all transactions depending on the accounting period which may either be calendar or fiscal year.
3. Capital losses can only be deducted to the extent of capital gains from the same type of transaction during the same period.
a. Net capital losses cannot be carried over to the proceeding year.
b. It cannot be deducted from gains subject to Ordinary Income Tax (not CGT0.
c. Net capital gains from disposition of shares in a DC (not sold, or disposed through stock exchange) are not included in computation of
net capital gains or loss in arriving at taxable income subject to Ordinary Income Tax.
4. CGT only applies to shares in DC.

a. Gains from shares in FC are not subject to CGT but Graduated Rates either as capital gain or ordinary income depending on nature of
taxpayer.
b. NRC and aliens are not subject to tax as any gain is considered from foreign sources regardless of place of transaction.
5. In case FMV of shares is greater than money and/or FMV of property received, excess of FMV of shares shall be deemed a gift subject to
Donor’s Tax.
a. Determination of gain:
i. Gain shall be the excess of amount realized over basis or adjusted basis.
ii. Amount realized shall be the sum of money received + FMV of property (other than money received) if any.
6. Shares of stocks becoming worthless:

a. Losses from shares held as capital asset which have become worthless shall be treated as capital loss. However, loss is not deductible
against capital gains from stocks but must be claimed from other capital gains.
b. For 5% and 10% CGT to apply, there must be an actual disposition of shares held as capital asset. Capital gains and capital loss shall be
used in determining the net capital gain. Finally, the gains and losses from be derived and incurred from such disposition.
7. If it is sale, barter or exchange of shares listed and traded through local stock exchange or through initial public offering, it is subject to
Percentage Tax and not CGT. Listing and actual trading must concur for Percentage Tax to apply.
a. If the shares are listed but sold outside the local stock exchange, CGT applies.
b. What is controlling is whether the shares are traded in the local stock exchange, not the nature of shares.
8. Assignments of deposits on stock subscriptions is subject to CGT.

a. This is because the very essence of CGT is to tax the profit of sale on net capital gain.
b. On the other hand, if the corporation requires additional funds for conducting its business and obtains funds through voluntary
payments from its shareholders, the amounts it received is created to its surplus account or special account. Thus, it will not be
considered income although there is no increase in the OCS of the corporation. Rather, these payments are considered voluntary
assessments that add to the operating capital of the corporation. These only increase the basis of the stockholder’s stock, hence still
part of capital not subject to income tax.
Disposition of real property held as capital asset by RC, NRC and RA.
1. This includes pacto de retro sales and other forms of conditional sales by individuals (including estates and trusts).
2. FMV is whichever is higher between the FMV determined by the CIR or by the Provincial and City Assessors.
a. It is imposed on gross selling price, FMV by CIR or FMV by PCA.
3. There is a presumption of gain.

a. Tax is due even if the real property has been sold for a price less than the acquisition cost.
i. This includes the following transactions:
1. Exchange of lots
2. Waiver of rights on rights, claims and interests over the land is not a sale, exchange or disposition of property
classified as a capital asset but rather an assignment of right. However, any gain realized as a consequence of the
waiver shall be subject to Income Tax.
3. Individual is still subject to CGT when he sells the real property even if he sells it as a loss due to the presumption
of gain.
4. Properties abroad and properties of aliens:

a. CGT does not apply to gains from sale of overseas real property. However, it applies to real properties of aliens located in the
Philippines.
i. Foreigners may own real properties in the Philippines:
1. An alien who is a legal or compulsory heir may acquire land through succession. Thus, a foreign married to a
deceased Filipino citizen may inherit and become a legal owner.
2. Aliens may acquire real properties before adoption of 1935 Constitution.
3. Aliens may acquire condominium units subject to 60%-40% limit under RA 4726. If the condominium building is
constructed on leased land, it may be 100% owned by foreigners.
4. Former natural-born Filipino citizens may acquire real properties under BP 185 and RA 8179.
b. Residents, cities are subject to regular income tax on sale of properties located outside the Philippines and not to CGT.
c. Gains by NRC and aliens located abroad are not subject to tax as they are sources without.
5. Payment of CGT must be done by the seller. However, equity and justice dictate that the same right to pay is extended to either party under
exceptional circumstances.
a. Return shall be filed by the seller with Authorized Agent Bank of RDO over the place where the property being transferred is
located.
i. If there are no AABs, return shall be filed with RDO.
b. Return shall be filed within 30 days after the sale, exchange or disposition.
i. In case of installment, it shall be filed 30 days after the receipt of first down payment or each subsequent installment
payment.
c. Date of execution of deed vs. date of notarization

Date of notarization Date of execution of deed
Date of GR: CGT is reckoned on date of : Presumption does not apply if there are other date appearing on the document, such
payment of Notarization. It is the prima facie date of as when the deed has been executed or signed and notarized on different dates. Thus,
CGT. consummation of contract. in case the deed has been executed or signed and notarized on different dates, date to
pay CGT is reckoned on date of execution.
i. Notarization does not make a contract complete.

1. Failure to observe the form prescribed in Art 1358 NCC does not render the acts or contracts invalid. The form is
not essential to the validity of the transaction but only for convenience.
2. A sale of real property, though not consigned in a public instrument or formal writing is valid and binding
because even a verbal contract of sale of real estate produces legal effects between parties.
d. Death of a principal who executed an SPA in favor of an agents renders the SPA without legal effect to be an integral part of the
Deed of Assignment or Absolute Sale. See notes on Assignment of Sale.
i. Contract of agency is basically personal and derivative in nature. Thus, agency is extinguished upon the death of the
principal.
ii. No tax is due since the document has no legal effect.
6. Real property subject to CGT.

a. Tax liability depends on whether properties are ordinary or capital, regardless of whether they are connected with trade or business or
not.
i. A land, where a warehouse used in storing products is constructed is not subject to CGT when sold because it is an ordinary
asset.
ii. An idle land, held for speculation to be sold when prices go up, by a taxpayer engaged in business that is not real estate is
subject to CGT.
b. With respect to banks, real properties they acquired through foreclosure are considered their ordinary assets. However, since they are
considered not habitually engaged in real estate business for purposes of withholding tax.
7. Classification of real property of taxpayers engaged in real estate business

a. A taxpayer, whose primary purpose of engaging in business or whose AOI states is primary purpose is to engage in real estate shall be
deemed to be in real estate business.
i. Dealers—all properties they acquire are Ordinary Assets.
ii. Developer—all properties acquired, and all properties held primary for lease or sale in ordinary course of business or trade
are Ordinary Assets.
iii. Lessor—all real properties for lease or rent or being offered for lease or rent are Ordinary Assets.
iv. Taxpayers habitually engaged in real estate business—Ordinary Assets.
b. Property purchased for future use in business even if this purpose was thwarted by circumstances beyond his control do not lose its
character has an Ordinary Asset. Mere discontinuance of active use does not change its character previously established as a
business property.
8. Classification of real property of taxpayer not engaged in real estate business

a. If properties are used, being used or previously used in trade or business, Ordinary Assets.
b. A depreciable asset does not lose its character as an Ordinary Asset even if it becomes fully depreciated or if there is failure to take
depreciation during the period of ownership.
c. Monetary consideration or absence of profit in operation is not material in characterizing property. As long as property has been used
for business purposes, it is an Ordinary Asset.
9. Real property used by an exempt corporation in its exempt operations (such as corporation included in Sec 30) is not considered used for
business purposes. Therefore, it is a Capital Asset.
a. Corporations Exempt from Taxes:
i. Labor, agricultural or horticultural organization not principally for profit.
ii. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized
and operated for mutual purposes and without profit
iii. Beneficiary society, order or association operating for exclusive benefit of its members (fraternal organization operating
under the lodge system, mutual aid association or non-stock corporation organized by employees providing for payment of
life, sickness, accident or other benefits exclusively to its members)
iv. Cemetery company for benefit of its members
v. Non-stock corporation for religious, charitable, scientific, athletic or cultural purposes or rehabilitation of veterans
vi. Business league, chamber of commerce, board of trade not organized for profit
vii. Civic league or organization not organized for profit
viii. Non-stock, non-profit educational institution
ix. Governmental educational institution
x. Farmer’s or other mutual typhoon or fire insurance
xi. Farmers’, fruit growers’ or like association organized and operated as a sales agent for its members
10. Real property not used in trade or business is treated as a Capital Asset whether single detached, townhouse or condominium unit.
11. If taxpayer changed its real estate business to a non-real estate business, or who amended its AOI from real estate to non-real estate business,
the change of business or amendment of primary purpose does not result in reclassification of real property from Ordinary Asset to Capital
Asset. For tax clearance, appropriate officer of BIR determines it.
a. In case of subsequent non-operation by taxpayers originally registered to be engaged in real estate business, all real properties
originally acquired by it continues to be Ordinary Assets.
12. Abandoned and idle real properties

a. If it was formerly an Ordinary Asset, it continues to be one.
i. : However, properties classified as ordinary assets for being used in business by a taxpayer engaged in business other
than real estate business are automatically converted into Capital Assets once it is shown that it has not been used in
business for 2 years before the consummation of taxable transactions involving these properties.
E bought a piece of land intended to be converted into a subdivision. NO. A property purchased for future use in the business does not lost is
However, construction materials became so expensive that he just character as an Ordinary Asset, even if the purpose is later prevented by
decided to sell the land. Is the land subject to CGT? circumstances beyond his control.
X Corporation is a corporation duly organized and existing under laws of YES. The proposed sale of land with the improvements will be treated as a
the Philippines. It is engaged in manufacturing and import business. sale of Capital Assets subject to CGT 6%.
In the course of its operation, it acquired several investments in real X-Corporation has completely ceased its commercial operation and it has
properties, including 2 parcels of land. During its operation, it erected an no intention of reviving its business. It follows that the real properties
office building and a warehouse for its business purposes. were not used in business since then. This automatically converts the
properties into capital assets, upon proof of non-use for at least 2 years.
It went into financial distress that it could no longer sustain its business
operations. It started to sell its properties as a process of winding up its The properties were not held for speculative purposes and did not form
affairs. It has no intention of reviving its business of which subject part of its inventory. CGT of 6% shall be based on the gross selling price or
properties were its former office and factory sites. FMV at the time of sale whichever is higher. This ruling is also applicable
to an individual taxpayer.
Is the sale of properties subject to CGT?
13. Treatment of real properties transferred to a buyer, whether transfer is through sale, barter or exchange, inheritance, donation or declaration
of property dividends
a. Capital or Ordinary assets in the hands of the seller may chance character in the hands of buyer/transferee. The rules are:
Seller Buyer Type of Asset
Real property transferred through succession or donation Heir or donee who is not engaged in the real estate business and Capital Asset
who does not subsequently use the property in trade or business.
Corporation which declared the real property divided is Stockholders who are not engaged in real estate business and who Capital Assets
engaged in real estate business do not subsequently use these in trade or business
Tax-free exchange by taxpayer not engaged in real estate Transferee is engaged in real estate business or even if not engaged, Ordinary Asset
business used the property in business
14. Conditional sales and pacto de retro sales

Pacto de retro Conditional sales
Definition Vendor reserves the right to repurchase or redeem the property. Sale will be contemplated if certain conditions are met.
Essence Title and ownership of property sold are immediately vested in The buyer takes possession of the property, but title and right of
the vendee a retro subject to the resolutory condition of repossession remains with the seller untilt he buyer pays the full
repurchase by a vendor a retro to repurchase the property. purchase price.
Implication Both the sale to vendee a retro and repurchase by the vendor a CGT is based on gross selling price in the deed of conditional sale
retro are subject to CGT> or FMV at time of execution whichever is higher, not the higher
between GSP stated in deed of absolute sale.
15. Reconveyance and Rescission do not trigger the imposition of CGP.

Reconveyance Rescission
Definition Restoring title to a property in the name of its previous owner Obligation to return the things which were the object of the
contract.
16. Transfer of real property subject to involuntary transfer

a. Involuntary tranfers:
i. This covers cases of expropriation or foreclosure sale.
ii. Involuntariness does not affect the classification of real property in the hands of the involuntary seller.
b. Taxability:
i. It is not the transfer of ownership per se that subjects the sale to 6% CGT but the profit or gain that was presumed realized
by the seller/mortgagor by means of the transfer. CGT is income tax on a person’s income.
c. Sale where right of redemption exists

i. Final tax is due upon expiration of redemption period.
ii. If right of redemption exists, certificate of title will not be cancelled yet even if the property had already been subjected tot
eh foreclosure sale. Instead, a brief memorandum will be annotated at the back of the certificate of title. Cancellation of
title and subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the mortgagor will
redeem or not the property within 1 year from issuance of certificate of sale.
iii. Thus, no transfer of title can be effected yet until the lapse of the 1-year period. Hence no CGT will be imposed because no
capital gain has been derived and no sale or transfer of real property was realized.
d. Non-redemption properties sold during involuntary sales

i. CGT shall be due regardless of type of proceedings and personalities of selling persons.
ii. Buyer, who is deemed to have withheld the CGT due from the sale shall file the CGT return and remit the tax to BIR within
30 days from expiration of redemption period.
iii. CGT shall be based on consideration (bid price) or FMV of zonal value, whichever is higher.
e. Expropriation:
i. Transfer of property through condemnation proceedings is a sale or exchange and profit from it constitutes capital gain.
NIRC provision covers both voluntary and non-voluntary sales. CGT in this case shall be computed based on actual
consideration.
1. : Expropriation sale shall not be subject to tax if the property sold will be replaced using the proceeds of share
sale according to Involuntary Conversion of Property Doctrine.
f. Involuntary Conversion of Property Doctrine: Relate this to Non-Recognition Principle.

i. No gain or loss shall be recognized if as a result of its destruction, theft or seizure, or power of requisition or condemnation
or threat or imminence of it, property is compulsorily or involuntarily converted into:
1. Property similar or related in service or use to the property so converted
2. Money which in GF expended in the acquisition of other property
3. Acquisition of control of a corporation owning such other property
4. Establishment of a replacement fund
ii. If any part of the money is not spent, the gain shall be recognized. However, it shall not be in an amount excessive to the
money so spent.
g. Proceeds of expropriation is considered a return of capital and therefore a capital gain. It does not partake the same nature of
interests paid on it.
i. Interest is compensation for delay in return of capital.
ii. For income tax purposes, interest does not form part of the price the government paid in condemnation proceedings. Thus,
it cannot be treated as part of capital gain.
h. Enforcement of tax lien of LGU

i. Under the LGC, an LGU may sell the real properties of a delinquent taxpayer to enforce its tax lien for unpaid real estate
taxes. This is conducted through public bidding or on public auction sale. Thus, tax base in computing CGT and DST on such
sale should be the highest bid price or FMV whichever is higher.
ii. Delinquent taxpayer shall be the one to pay CGT and DST due on the said sale since sale by LGU is in his behalf. It is just
enforcing a tax lien for the unpaid real property taxes.
iii. However, the LGU may opt to all all its expenses in the selling price. In this case, the delinquent taxpayer shall no longer pay
for it at the expiration of redemption period if he fails to redeem. Rather, the purchaser will absorb the burden.
i. Forfeited properties or purchase by LGU because there are no bidders

i. If there are no bidders for sale in the public auction, the local treasurer conduct the sale shall purchase the property on
behalf of the LGU. CGT shall for the account of the real property owner.
ii. However, if the owner fails to redeem he property, LGU’s forfeiture or purchase is subject to CGT and the LGU will be the
one liable to pay for it for the property to be registered in its name.
j. Extension of real estate mortgage by a third party

i. Extension is not equivalent to sale, exchange or disposition of real property because there is not transfer of ownership.
k. Options of individual taxpayer in case of sales or other dispositions to the government.
i. Gains from sales or other dispositions of real property to the government or to GOCCs shall be determined either as
Ordinary Gain or Capital Gain. In other words, in case of sale (including expropriation) of property to the government,
individual taxpayer may choose a tax beneficial to him. This option is not available to the corporation.
ii. Note: Under Graduated Rates, non-taxability is possible if there is loss because only gains are subject to tax. On the other
hand, under CGT, there is always presumptive gain.
17. Sale on installment and deferred payment basis

a. GR: Whole profit accruing from a sale of property is taxable as income in the year the sale is made.
i. : If not all of the sale price is received during such year, and a statute provides that income shall be taxable in year
received, profit from an installment sale is to be distributed in the years installments are paid or received.
Sale of real property on installment plan Sale on a deferred payment basis, not
on installment plan
Initial Sale is on installment plan if the initial payments of the year do not exceed 25% of the Sale is on deferred payment basis if the
payments selling price. initial payments exceed 25% of the
selling price.
Implication Taxpayer engaged in business Not engaged in business It is treated as sale on cash basis. Thus,
Tax shall be deducted and withheld from every NO withholding is required buyer shall withhold the tax based on
installment. on the periodic installment GSP or FMV on the first installment,
payments. whichever is higher.
GSP or FMV shall be multiplied by a fraction which the
collected amount bears to GSP to determine taxable Tax is withheld on the last
portion. installment.
 A sold his capital property with an FMV of 1,000,000 for 900,000 in 3 annual
installments of 200,000, 300,000 and 400,000.
With respect to 300,000 installment on the second year, 20,000 shall be withheld
(300,000/900,000 x 1M x 6%)
b. “Initial payments” are payments received in cash or property other than evidences of indebtedness.
i. This is different from “Downpayment” because it is broader.
1. While it covers downpayments made, it goes further and includes all payments actually or constructively
received during the year of sale. Aggregate of all these payments determines whether the law under the law has
exceed.
18. Assignment of right:

a. Assignment shall be considered a separate sale when assignment was with consideration and it was done before the deed of sale
was executed.
b. Gain is computed as the difference of the assignment and the amount actually paid by the buyer-assignor.
c. It is the assignor-buyer who pays the CGT because he is deemed the owner of the land who is to gain from the assignment.
Situation If the buyer assigns his real right for consideration to a third If the buyer assigns his real right for consideration to a third
contemplated party after he has paid the entire purchase price but before the party before full payment of the purchase price.
deed of sale was executed
Tax It is subject to CGT. It is still subject to CGT but gain is computed as the difference
implication
19. Sale of principal residence

a. Gain is presumed when natural persons sell or dispose their principal residence.
i. However, if proceeds are used to acquire or construct a new principal residence within 18 calendar months, this shall be
exempt from CGT. Relate this to Non-Recognition Principle as your why (EXTRA POINTS).
ii. Tax exemption may be availed of only once every 10 years.
b. GR: Principal business means dwelling house, including the land on which it is situated where the head of the family and his family
members reside.
i. Actual occupancy is not considered interrupted or abandoned just because of the individual’s temporary absence. Relate
to Family Home in NCC. There must be an intent to return.
1. In this case, sale of house without the land will not be covered by the exemption rule. Sale of the house will be
subject to CGT because it is a real property.
ii. Proof:
1. Residential address in the latest income tax return immediately preceding the date of sale is treated as
conclusive presumption about his true residential address as well as Certification of Building Administrator in
cases of condominium units. This is in accordance with Doctrine of Admission against Interest or Principle of
Estoppel.
2. If the vendor is exempt from filing any tax return, thus having no tax record immediately before the sale,
Certification of Barangay Chairman or Building Administrator will suffice.
c. EXCEPTIONS:
i. If ownership of land and dwelling house belongs to different persons, only the dwelling house shall be treated as the
Principal Residence. Thus, only the sale or disposition of dwelling house shall be entitled to the benefit of tax exemption
from CGT. This is different from NCC principle of dwelling where house and land must be owned together.
1. : However, if both the owner of the land and owner of house both reside in it, both the land and dwelling
house will be considered their Principal Residence.
ii. If the land and dwelling house are owned by several co-owners and the property is actually used as a Principal Residence
by one or some co-owners, the co-owners actually occupying it shall enjoy the exemption to the extent oftheir
proportionate share in the value of the residence.
d. Conditions for Exemption:

i. Proceeds must be fully utilized in acquiring or constructing a new principal residence within 18 calendar months from date
of sale or disposition.
ii. 6% CGT due shall be deposited in cash or manager’s check in interest-bearing account with an Authorized Agent Bank under
Escrow Agreement among concerned RDO, Seller and AAB.
1. This shall only be released upon certification of RDO that proceeds have been in fact utilized in acquisition and
construction of a new Principal Residence.
iii. Taxpayer shall notify CIR of his intention to avail of the tax exemption within 30 days from date of sale or disposition.
iv. Tax exemption can only be availed of once every 10 years.
v. Historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence
built or acquired.
e. Failure to submit documentary evidence within 30 days of lapse of 18-month period shall give the presumption that the taxpayer
has failed to utilized the proceeds for acquisition or construction of the new Principal Residence.
i. He shall be treated deficient in the payment of his CGT and he shall be assessed for deficiency CGT inclusive of 20% interest
per annum.
ii. The taxpayer shall be issued with a Post Reporting Notice and PAN before issuance of Formal Assessment Notice. If the
escrowed tax money is still in the custody of Depository Bank, the full amount shall be applied in computing for the
deficiency CGT.
1. If the amount he deposited in the Escrow shall not be sufficient to cover for the entire amount assessed, the
seller/transferor shall remain liable for the balance.
2. If the amount he deposited is in excess, it shall be returned by the Bank upon authorization of CIR.
f. If there is no full utilization or only partial utilization of proceeds, he shall be liable for deficiency CGT inclusive of 20% interest per
annum from the 31st day after date of sale or disposition of old Principal Residence.
i. Since the entire proceeds was not utilized to acquire the new principal residence, the cost basis to be carried over to his
new principal residence shall be equivalent to the proportion of the utilized amount over GSP applied on the historical cost.
g. Disposition of principal residence in exchange for property.

i. In order to avail of the tax exemption from CGT with respect to these changes, taxpayer is required to acquire his new
residence within 18 months.
Principal residence is disposed Disposition shall not be subject to CGT as long as the condominium unit shall be used as the new principal residence.
in exchange of a condominium However, the landowner shall be subject to CGT or income Tax.
unit
Old Principal residence plus Unutilized portion is subject to CGT determined by the difference between total consideration made on the sale of old
cash or Another property in principal residence transferred (FMV of Old Residence + Cash or FMV of other property) and total consideration
exchange for new principal received (FMV of New Residence) for the exchange.
20. Transfer of title from trustee to trustor is not subject to CGT because what is only transferred is the legal title.
a. In this case, conveyance is not motivated by valuable consideration but it only acknowledges, confirms and consolidates the legal title
and beneficial ownership.
21. Replacement of an unfit or defective real property sold to a buyer with another real property is not subject to CGT.
a. Agreement to exchange properties in order to correct a mistake in designation of lots is without monetary consideration and only
rectifies the situation. However, if the properties involved are of different sizes, the excess is subject to CGT.
DC Shares of stock not traded through a local stock exchange 10%, if over 100,000
5%, if over 100,000
1. 6% CGT is imposed on gain presumed to have been realized on sale, exchange or disposition of lands and/or buildings which are not actually
used in the business of a corporation and are treated as capital gains, based on GSP or FMV whichever is higher. However, unlike individuals,
CGT is imposed not on properties but merely on lands and buildings. Thus, Other real properties (enumerated under Art 415) owned by DC are
subject to Corporate Income Tax.
2. Real property used by an exempt corporation in its exempt operations, shall be considered as a Capital Asset because it considered not used
for business purposes.
a. On the other hand, real property received as dividend by stockholders who are not engaged in the real estate business and who do not
subsequently use it in trade or business shall be treated as Capital Assets in the hands of recipients even fit he corporation which
declared the real property dividend is engaged in real estate business. Thus, the sale will be subject to CGT.
3. Liability to CGT is imposed on presumed gains realized from sale, exchange or disposition of lands and buildings.
a. BIR Ruling 091-99 opined that for a corporation to be liable to tax, a true sale, exchange or disposition of capital assets must have
transpired.
b. Thus, this does not apply in Pacto De Retro Sales and Conditional Sales Only a close and completed transaction resulting from an
absolute contract of sale is subject to CGT. Any substantial condition in a transaction will postpone taxability.
4. Installment or deferred payment sale. Same as in Individual.

Sale of real property on installment plan Sale on a deferred payment basis, not
on installment plan
Initial Sale is on installment plan if the initial payments of the year do not exceed 25% of the Sale is on deferred payment basis if the
payments selling price. initial payments exceed 25% of the
selling price.
Implication Taxpayer engaged in business Not engaged in business It is treated as sale on cash basis. Thus,
Tax shall be deducted and withheld from every NO withholding is required buyer shall withhold the tax based on
installment. on the periodic installment GSP or FMV on the first installment,
payments. whichever is higher.
GSP or FMV shall be multiplied by a fraction which the
collected amount bears to GSP to determine taxable Tax is withheld on the last
portion. installment.
 A sold his capital property with an FMV of 1,000,000 for 900,000 in 3 annual
installments of 200,000, 300,000 and 400,000.
With respect to 300,000 installment on the second year, 20,000 shall be withheld
(300,000/900,000 x 1M x 6%)
RFC Capital Gains from Sale of Shares

Sale of shares in a FC Not subject to tax because these are
considered outside Philippine sources.
Shares of stock not traded through a local stock exchange 10%, if over 100,000
5%, if over 100,000
Shares of stock listed and traded through local stock exchange .5% Percentage Tax
Capital Gains from Real Property held as Capital

Sale of building or condominium unit situated in the Philippines Graduated rates
Losses Capital asset Ordinary asset

Determination 1. Property is not actually used in trade or business of the taxpayer. 1. Stock in trade or other property of a kind which would be
2. It is not held for lease or sale to customers. included in the inventory at the close of the taxable year.
3. It is only held for investment purposes, even if it became vacant and 2. Property held for sale in the ordinary course of his trade or
idle. It does not become part of inventory for sale or lease and is not business.
actually used in business. 3. Property used in trade or business subject to allowance for
depreciation.
4. Real property used in trade or business.
sale and exchange
Taxable income of It is not part of taxable income for Graduated Rates but it is a gain from capital, It is part of taxable income under Graduated Rates.
Capital Gains hence, subject to CGT.
Deductibility of It is deducted against the capital gains only, then NELCO applies. It is deducted from the gross income.
Capital Losses
Common notes:
Losses from In computing net income, no deductions in respect to Loss shall be allowed if the sales or exchanges of property are between:
sales or 1. Members of a family.
exchanges 2. Individual-borrower who owns more than 50% in value of outstanding stock in the corporation-lender.
from 3. Between two corporations where more than 50% in value of each is owned by or for the same individual.
property 4. Grantor and fiduciary of any trust.
5. Fiduciary of a trust and fiduciary of another trust if their grantor is the same person.
6. Fiduciary of a trust and its beneficiary.
1. Family Unit:
a. This shall include only his brothers and sisters, spouse, ancestors and lineal descendants.
i. Conversely, the losses may be deducted if sale was entered by the following, unless they only act as nominee for a family member:
1. In-laws and step relationships
2. Other collateral relative (cousins, nieces, nephews, aunts and uncles)
ii. Illustrations:
1. Stepparent and stepchildren is not considered part of the taxpayer’s family.
b. Effect of transaction:
i. Any gain is taxable but loss is not deductible.
ii. Gain may not be offset by loss.
iii. If it results to a loss and there is a subsequent transfer of property to a third party, the gain to be recognized is limited only to the extent that it is more
than the loss disallowed in the first related transaction.
A sold machinery to his brother for 8,500. A acquired the same for 10,000. In this case, A’s loss of 1,500 would not be deductible.
B sells the machinery to C for 11,000. When B sold the machinery to C, resulting to a gain of 2,500 on his end. He can only
recognize a gain of 1,000 or the amount exceeding the loss disallowed.
B sells the machinery for 8,000 to C instead of 11,000. B recognizes a loss of 500. He still cannot deduct the loss.
2. Corporations and affiliates:

a. The following exchanges cannot be deducted:
i. Individual-borrower who owns more than 50% in value of outstanding stock in the corporation-lender.
ii. Between two corporations where more than 50% in value of each is owned by or for the same individual.
b. This is extended to:

i. Transaction between a corporation and a stockholder when the stockholder owns at least 50% of OCS of the corporations.
ii. Transaction involves two corporations, both of which are controlled or majority-owned by more than 50% by the same person if either one of the
corporation was a personal holding company or a foreign holding company during the taxable year preceding the date of sale or exchange.
1. This applies only to transactions but not to distributions of property because of liquidation.
2. It is not necessary that either of the corporations be a personal holding company or a foreign personal holding company on the date of the
exchange, but it is necessary that at least one of them is one during the taxable year preceding the date.
iii. Transaction with a corporation when it is not acting in a fiduciary capacity.
1. This applies only to transactions but not to distributions of property because of liquidation.
c. Constructive Ownership of Stock or Attribution Rule:

i. In determining whether a person directly or indirectly owns any of the outstanding stock of a corporation, the following rules must apply:
Stock directly or indirectly owned by or for a corporation, partnership, estate or trust is A owns 80% of B-Corp, which in turn owns 70% of C-Corp.
considered proportionately by or for its shareholders, partners or beneficiaries. In this situation, A owns 56% of C-Corp (80% x 70%) because of her stockholders
in B-Corp.
Individual is considered to own the stock owned by or for his family. A owns 40% interest in B-Corp.
A’s husband owns 20% interest.
A’s daughter owns 5% interest
A’s nephew owns 10%.
In this situation, A is treated as owning 65% of B-Corp (40% + 20% + 5%). The
nephew is not considered a related party.
Individual owning any stock in a corporation is considered to own the stock directly or indirectly A was constructively owning 56% of C-Corp.
owned by or for his or her partner (other than applying Rule 2) A’s husband would have to include A’s 56% with any stock in C-Corp he actually
owns when testing for loss disallowance because A’s constructing holdings are
treated as actual holdings for these purposes.
When applying Rules 1-3, stock constructive owned by a person under Rule 1 is treated as There should be no double attrition.
actually owned by that person.
But stock constructively owned by an individual under Rule 2 and Rule 3 is not treated as
owned by that individual to make another person the constructive owner of the stock.
3. Trusts
a. A trust cannot be deducted as a loss if the sale or exchange is between any of the following:
i. Grantor and fiduciary of a trust
ii. Fiduciary and another fiduciary of another trust created by the same grantor
iii. Fiduciary and beneficiary of the same trust
iv. Trust fiduciary and a corporation of which more than 50% in value of outstanding stock is owned directly or indirectly by or for the trust or by or for the
grantor of the trust.
v. Executor of an estate and a beneficiary of that estate, except when sale or exchange is to satisfy a legacy
b. A trust may be created by any of the following methods:

i. Declaration by the owner that he holds the property as trustee.
ii. Transfer of property by the owner during the owner’s lifetime to another person as trustee
iii. Exercise of power of appointment to another person as trustee or an enforceable promise to create a trust.
c. Grantor (trustor, settlor or creator) is generally the owner of the assets initially contributed to the trust.
i. Trustee obtains legal title to the trust assets and is required to administer the trust on behalf of the beneficiaries.
ii. Fiduciary is charged with the duty to act for another. A trustee is a fiduciary.
Notes on Loss on Ordinary Assets:

1. Taxpayers can claim a casualty or theft loss of inventory, through:
Increases the cost of goods sold Claim of loss separately as casualty or theft loss
Implications They can no longer claim the loss again as casualty or If they do so, they should adjust opening inventory or purchases to eliminate loss items and avoid counting
theft loss. the loss twice.
Any insurance or other reimbursement received for 1. If they claim the loss separately, they should deduct it with reimbursement they receive or
the loss is taxable. expect to receive.
2. If they do not receive the reimbursement at the end of the year, they cannot claim a loss for
reimbursements they failed to receive.
2. Requisites for deductibility:

a. Taxpayer must personally suffer the loss.
b. Taxpayer must prove the elements of loss claimed such as the nature and occurrence of the event and amount of loss.
c. It must be connected with trade, business or profession of the taxpayer.
d. It must be actually sustained and charged off within the taxable year.
e. It must be evidenced by a closed and completed transaction.
f. It must not be compensated for by insurance or other forms of indemnity.
g. It must not be previously claimed as a deduction for estate tax purposes in the estate tax return.
h. For casualty losses, there must be a sworn declaration of loss filed within 45 days after date of occurrence of casualty, robbery, theft or embezzlement.
3. Tax Benefit Rule

a. When a taxpayer recovers, is refunded or credited of any amount he deducted in a prior taxable year, he must include it in his gross income for that year.
i. If a taxpayer recovers part of an expense in the same year he claimed for a deduction, he must reduce his current year expense by the amount he
recovered.
ii. If he recovers in another year, he must include it in the income. He cannot amend the prior year’s tax return to reduce the loss. Instead, the recovery
must be included as income in the year received. This applies even if he only recovers a portion of the loss.
iii. If the part of deduction did not reduce his tax, he does not have to include the amount in the income:
4. Net operating loss carry-over:

a. This is deduction of accumulated net operating losses from gross income for the immediately preceding 3 consecutive years after the year of loss.
b. Requisites:
i. The taxpayer has suffered net operating losses in the year immediately preceding the current taxable year it invokes the NOLCO.
ii. He must not be exempt from income tax in the taxable year he claims the NOLCO.
iii. He must not have claimed the 40% optional standard deduction.
iv. He must not have previously offset the net operating losses as a deduction from his gross income.
v. In case the taxpayer is a business or enterprise, change of ownership is acceptable provided it is not substantial.
vi. Losses were in the course of trade, business or profession.
c. Application of NOLCO:
i. No carry over if the subsequent year resulted in a loss. One year will be deducted from the 3-year period.
ii. It cannot be carried over beyond 3 years from year of loss.
iii. Net loss to be carried over cannot exceed the net income of the subsequent year. If the net income is not enough to cover the entire net loss, the set-off
will be up to the net income and the remainder of the net loss will be absorbed by the following year.
iv. Net loss cannot be carried over the next year until it is consumed in the year prior. No skipping.
Notes on Loss of Capital Assets:

1. These are deducted from Capital Gains as an off-set, not to gross income since it is not included in the computation of Gross Income in the first place.
a. Legal basis:
i. Losses from sales or exchanges of capital assets shall be allowed. But only to the extent in SEC 39. Thus, capital loss can be deducted only from capital
gains, and not from gross income.
ii. Sec 39 states, “losses shall be allowed to the extent of gains from such sales or exchanges”.
1. : If a Philippine bank or trust company sells any bond, debenture, note or certificate or other evidence of indebtedness issued by another
corporation, any loss from the sale shall not be subject to the limitation and it shall not be included in determining its applicability to other
losses.
2. SEC 40(c)(1) states, “entire amount of gain or loss shall be recognized upon the sale or exchange of property”.
a. EXCEPTIONS (Tax-free exchanges where no gain or loss shall be recognized):
i. Transfer to a controlled corporation.
ii. Merger or consolidation.
b. Implications here is that, determination on whether the loss would be deductible or gain taxable are dealt with in other
sections of the NIRC.
2. Holding Period:
a. In case an individual tax payer (must not be a corporation), only the following percentages of gain or loss shall be taken into account in computing net capital
gain, net capital loss and net income:
i. If the capital asset has been held for less than 12 months, 100% of its gain or loss shall be recognized.
ii. If the capital asset has been held for more than 12 months, 50% of its gain or loss shall be recognized.
b. If your long-term capital losses on investment property are more than your capital gains for the year, you can deduct your capital losses.
i. Short-term losses are first deducted from short-term gains, and long-term losses are deducted from long-term gains.
ii. If the losses exceed the gains, these can be deducted up to SEC 39 (extent of gains). If the net loss is greater than the extent of gain, the loss can be
carried over.
c. A corporation is not subject to this rule and always deducts its loses and/or reports its gains in full or at 100%.
d. Certain dispositions of shares of stock and real properties held as capital assets are subject to Rules on GT and Percentage Tax.
A bought a painting worth 2,000,000 in 2000. He sold it for 3,000,000 in 2003. 500,000 (50% of 1M) because the painting has been held
What is his taxable gain? for more than 12 months.
A bought a sculpture worth 1,000,000 in 2003. He sold it for 600,000 in the same year. How much is his capital loss? 400,000 (100%) because the sculpture has been held for
not more than 12 months.
Considering the two foregoing illustrations, capital losses are not to be deducted from the gross income. Instead, it should be offset with the capital gain. In this case, A’s net
capital gain is 100,000.
3. Net Capital Loss Carry-Over for an individual taxpayer

a. An individual taxpayer who sustains a net capital loss in a year may fully deduct it in the succeeding taxable year but in an amount not in excess of the net income
fo that year.
b. The carry over is limited to the succeeding year only.
c. This does not apply to corporations because a corporation records capital gains and losses in full regardless of holding period. It is not entitled to carry-over the net
capital loss.
Capital gains
and losses a. Gains and losses
Percentage taken into account:

1. Holding period and percentage (See Capital Losses under Losses)
a. In case an individual tax payer (must not be a corporation), only the following percentages of gain or loss shall be taken into account in computing net capital gain,
net capital loss and net income:
i. If the capital asset has been held for less than 12 months, 100% of its gain or loss shall be recognized.
ii. If the capital asset has been held for more than 12 months, 50% of its gain or loss shall be recognized.
2. Transfer of assets by liquidating corporation (gain from sale or exchange of shares)

Sale of domestic shares Sale of domestic shares when the corporation is in liquidation Sale of other assets when
the corporation is in
liquidation
Taxability Net capital gain on sale of domestic shares not When the corporation was dissolve and its shareholders surrender This is not considered a sale.
listed and traded in stock exchange is subject to CGT their stock to it and it paid sums to them in exchange, it is the same as It is exempt from income
of 5% or 10%. a sale of the same stock to a third party who paid for it. Thus, even taxes, creditable withholding
though it is a capital loss or capital gain, it is subject to income tax. and DST.
Holding period If the shareholder is an individual, it is subject to a No holding period No holding period
holding period.
a. GR: Net capital gain on sale of domestic shares not listed and traded in stock exchange is subject to CGT of 5% or 10%.
i. : This does not apply to transfer of shares by stockholder to the issuing corporation if it was done during liquidation.
b. If the corporation only undergoes partial or complete liquidation, it does not realize a gain or loss.
Limitation of capital losses: See Capital losses

4. Deductibility of capital loss: losses shall be allowed only to the extent of gains from such sales or exchanges. If the dealings in capital assets during the year result in a net
capital loss, this cannot be deducted from his ordinary income.

Quick Look (Capital Gains Tax)

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Quick Look (Capital Gains Tax)

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Taxation Law Review

Quick Look (Capital Gains and Losses)

Types of Income Net income Gross income Taxable income

Following the Realization Test, we follow this format in the reviewer:

Notes on Capital Assets:

i. Instances when a person disposes or exchanges a capital for another capital.

2. The following are not capital assets:

4. The following are capital transactions:

Taxable Income Capital asset Ordinary asset

Notes Applicable to Ordinary Income:

2. Amount realized and adjusted cost:

Gains Capital asset Ordinary asset

Notes on Gains from Capital Assets:

Resident Citizens, Type of capital gain CGT Rate

Shares of Stock not traded through a local stock exchange:

4. CGT only applies to shares in DC.

6. Shares of stocks becoming worthless:

8. Assignments of deposits on stock subscriptions is subject to CGT.

3. There is a presumption of gain.

4. Properties abroad and properties of aliens:

c. Date of execution of deed vs. date of notarization

i. Notarization does not make a contract complete.

6. Real property subject to CGT.

7. Classification of real property of taxpayers engaged in real estate business

8. Classification of real property of taxpayer not engaged in real estate business

12. Abandoned and idle real properties

14. Conditional sales and pacto de retro sales

15. Reconveyance and Rescission do not trigger the imposition of CGP.

16. Transfer of real property subject to involuntary transfer

c. Sale where right of redemption exists

d. Non-redemption properties sold during involuntary sales

f. Involuntary Conversion of Property Doctrine: Relate this to Non-Recognition Principle.

h. Enforcement of tax lien of LGU

i. Forfeited properties or purchase by LGU because there are no bidders

j. Extension of real estate mortgage by a third party

17. Sale on installment and deferred payment basis

18. Assignment of right:

19. Sale of principal residence

d. Conditions for Exemption:

g. Disposition of principal residence in exchange for property.

4. Installment or deferred payment sale. Same as in Individual.

RFC Capital Gains from Sale of Shares

Capital Gains from Real Property held as Capital

Losses Capital asset Ordinary asset

2. Corporations and affiliates:

b. This is extended to:

c. Constructive Ownership of Stock or Attribution Rule:

b. A trust may be created by any of the following methods:

Notes on Loss on Ordinary Assets:

2. Requisites for deductibility:

3. Tax Benefit Rule

4. Net operating loss carry-over:

Notes on Loss of Capital Assets:

3. Net Capital Loss Carry-Over for an individual taxpayer

Percentage taken into account:

2. Transfer of assets by liquidating corporation (gain from sale or exchange of shares)

Limitation of capital losses: See Capital losses

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