GAIN OR LOSS FROM SALE OR EXCHANGE OF PROPERTY b) If property was acquired by inheritance, the basis of the property is the

ed by inheritance, the basis of the property is the FMV of the

Sale or exchange of properties are classified into:
• Sales resulting to Capital Gains (subject to “CGT”)
o On the sale of domestic shares. ;
o On the sale of real property classified as capital assets.
• Tax-Free Exchanges - where No Gain nor Loss is Recognized
o Tax-free exchanges pursuant to a corporate reorganization under Section
40(C)(2) of the Tax Code (merger or consolidation)
o Like-Kind Exchanges
property at the time of death of the decedent (step-up in basis).
c) If the property was acquired by gift, the basis of the property is the basis in the hands of the
donor. Except that if such basis is greater than the FMV of the property at the time of the gift,
then the basis shall be such FMV for the purpose of determining the loss.
d) If property was acquired for less than an adequate consideration, the basis of the property
is the amount paid.
e) If property was acquired in a previous tax-free exchange where gain or loss is not
recognized under Section 40(C)(2), the basis is the substituted basis.

• Sales or Exchanges Where Gain, but Not Loss is Recognized Adjusted Basis
o Exchanges not solely in kind pursuant to a corporate reorganization where
boot Is received. After a property is acquired, its basis can be increased by improvements that materially add to
o Transactions between related persons under Section 36(B) of the Tax Code. its value or life, and is decreased by accumulated depreciation.
o Illegal transactions.
o Wash sale losses of securities Formula:
• Sale or Exchange of Ordinary Assets; and
• Sale or Exchange of Other Capital Assets (i.e. capital assets other than those whose Basis of property XXXX
sale is subject to CGT) Plus: Improvements XXXX
o If the transaction is a sale, the gain or loss to be recognized is computed as Less: Accumulated Depreciation (XXX)
follows: Adjusted Basis XXXX
▪ Sale XXXX
Less: *Basis (Xxx) Use of Basis
Gain (Loss) XXXX Basis is used to determine:

If the transaction is an exchange, the property received must be essentially different from the • Gain or loss in transactions involving ordinary assets.
property disposed of, otherwise no gain or loss is recognized. The gain or loss is computed as • Gain or loss involving capital assets which are not subject to the CGT.
follows: • Gain or loss in the sale of domestic shares not traded in the stock exchange.
• Gain or loss in forced sale of an individual taxpayer of real property to government in
FMV of the property received XXXX the exercise of the latter’s power of eminent domain; and
Less: Basis of property given (xxx) • Gain or loss in the sale of real property classified as capital asset of an RC or NRC.
Gain (Loss) XXXX
CLASSIFICATION OF PROPERTIES FOR TAX PURPOSES
*BASIS
Ordinary Assets
a) If property was acquired by purchase, the basis of the property is the cost to the buyer.
a) Stocks in trade of taxpayer or other property of a kind. Stocks included in inventory;
b) Property primarily held for sale; ered as a loss from the sale or exchange, on the last day of such taxable year, of capital
c) Property used in business which is capitalized and subject to depreciation; assets.
d) Real property used in the trade business, or profession of the taxpayer c. Retirement of bonds – Amounts received by the holder upon the retirement of bonds,
debentures or other evidence of indebtedness issued by any corporation (including
Capital Assets those issued by the government) with interest coupons or in registered form, shall be
Asset which is not an ordinary asset, such as: considered as amounts received in exchange therefor.
(1) personal or non-business property or d. Liquidating Dividend – When a corporation distributes all of its assets in complete liq-
(2) asset held merely for investment, or uidation, the gain or loss sustained by the stockholder, whether individual or corporate,
(3) property not used in business is a capital gain or loss as the case may be.
e. Liquidation of partnership – When a partner retires or the partnership is dissolved, he
Transaction covered by rules on capital gains and losses – Applicable only if the realizes capital gain or sustains capital loss as follows:
transaction on the capital assets is by sale or exchange. Amount received for his interest Xxx
3. Limitation on deduction of capital losses – Losses from sale or exchange of capital assets Less: Investment xxx
shall be allowed only to the extent of the gains from such sale or exchange. Share in undistributed partnership net income xxx Xxx
4. Holding period – The length of time the asset was held by the taxpayer. It covers the Capital gain Xxx
period from the date of acquisition of the asset to the date of sale. Capital loss (xxx)
5. Gain or loss to be taken into account – If taxpayer is an INDIVIDUAL, the following f. Option gains or losses – Gains or losses attributable to the failure to exercise privileges
percentages of the gain or loss shall be taken into account: or options to buy or sell property shall be considered as capital gains or losses.
100% if the asset has been held for not more than 12 months g. Gains and losses from short sales – Gains or losses from short sales of property shall be
50% if the asset has been held for more than 12 months considered as gains or losses from sales or exchanges of capital assets.
6. Capital loss carryover – If an individual taxpayer sustains in any taxable year a net capital
loss, such loss shall be treated in the succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more than 12 months. Limitation – cannot exceed, “Short selling” is selling something one does not own in the future at a particular price in the
however, the net income of the year in which the loss was sustained. hope that the property goes down in value, For tax purposes, a short sale is deemed
consummated upon delivery of the property to cover the short sale.
7. Rulings on capital assets transactions:
a. Individual b. Corporation WASH SALE LOSS
1. Holding period. 1. No holding period.
2. Capital losses are allowed only to the extent 2. Capital losses are allowed only Requisites:
to 1) Sale of securities at a loss, and
of capital gains the extent of capital gains. 2) Identical securities were purchased within a 61-day period, beginning 30 days before the
3. Net capital loss carryover allowed. 3. Net capital loss carryover is not sale, and ending 30 days after the sale.
allowed. 3) The taxpayer is either (a) not a dealer in securities, or (b) if a dealer, the sale was not made
8. Transactions resulting in capital gains and losses even if there are no sales or in the ordinary course of business.
exchanges
(a – f) of capital assets. SUMMARY
a. Worthless shares of stock – If shares of stock become worthless during the taxable year Taxability of gain or Deductibility of loss
and are capital assets, the loss shall be considered as a loss from the sale or exchange, Ordinary asset (always AITR under B compartment):
on the last day of such taxable year, of capital assets. Ordinary gain – 100% Taxable
b. Worthless bonds – If bonds, debentures, or other evidence of indebtedness of any Ordinary loss – 100% Deductible
corporation (including those issued by the government) are ascertained to be worthless Capital asset (AITR under Ca compartment, General Rule):
and charged off within the taxable year and are capital assets, the loss shall be consid-
Individual:
1. With holding period (DA to DS)
a. Not > 12 months (short-term):
Capital gain – 100% Taxable
Capital loss – 100% Deductible
b. > 12 months (long-term):
Capital gain – 50% Taxable
Capital loss – 50% Deductible
2. Capital loss deductible only to the extent of capital gain
3. Net capital loss carryover (immediate ff. taxable year) allowed, in an amount not in
excess of the net income for such year
Corporation:
1. No holding period:
Capital gain – 100% Taxable
Capital loss – 100% Deductible
2. Capital loss deductible only to the extent of capital gain
3. No net capital loss carryover

Capital Gains tax rates:

Individual & Domestic Corporation only:
1. Sale, exchange or other disposition of real property (capital asset) located in the Phil-
ippines (6% of GSP or FMV whichever is higher)
All income taxpayers (Individuals and Corporations):
2. Sale, exchange or other disposition of stock investment (capital asset) in a Domestic
Corporation (within Philippines) outside PSE. (15% of net capital gain )