CHAPTER 29 CAPITAL GAINS AND LOSSES

Kinds of assets:

a. Ordinary assets
b. Capital assets – property held by the taxpayer (whether or not connected his trade/business),
but does not include (ordinary assets):
1. Stock in trade/other property of a kind included in the inventory of the taxpayer
2. Property held primarily for sale in the ordinary course of trade/business
3. Property used in trade/business subject to depreciation
4. Real property used in trade/business

Kinds of property included in capital assets

1. Personal or non-business properties

2. Property held for investment (ex. Interest in a partnership, stock investments)
3. Property not used in trade/business (ex. Idle/vacant land or building)

Taxation of Capital Transactions

 Capital transactions – sale/barter/exchange/disposition of capital assets

 4 kinds of capital transactions are subject to final taxes; the rest are subject to regular income
tax

Sale or exchange of CA subject to FT

a. Tax on sale/barter/exchange of domestic shares listed and traded through the local stock
exchange – 6/10 of 1% on gross selling price/gross value in money
b. Tax on domestic shares of stock sold/exchanged through an IPO based on gross selling
price/gross value in money in proportion of shares of stock sold to the total outstanding shares
of stock after the listing in the local stock exchange
Up to 25% - 4%
Over to 25% but not over 33 1/3% - 2%
Over 33 1/3% - 1%
c. Capital gains from the sale of shares of stock not traded in stock exchange
1. By individual taxpayers & domestic corporations – 15%
2. By foreign corporations
Not over P100,000 – 5%
Amount in excess of P100,000 – 10%
d. Capital gains from sale of real property classified as capital assets by individual taxpayers and
domestic corporations – 6% on gross selling price/current market FV whichever is higher

NOTES:
1. In a & b, FT is a percentage tax
2. In c & d, FT is an income tax
3. If a corporation buys back its own shares (treasury shares), a & c shall apply depending on
whether shares are listed or not listed in local stock exchange.
 4. When preferred shares are redeemed when the issuing corporation is still a “going
concern”, capital gains/losses is recognized which is the diff. bet. the amount received at the
time of redemption and the cost of preferred shares. The net capital gain is subject to
regular income tax rates on individuals, or corporate income tax for corporations.
 Holding period – length of time assets is held by taxpayer (from the date of acquisition to date
of sale/exchange)

Gain or loss to be taken into account

1. In the case of ordinary assets
a. Ordinary gain – taxable in full
b. Ordinary loss – deductible in full
2. In case of capital assets other than those whose sale give rise to CGT (final tax) – the ff.
percentages of the gain/loss recognized upon sale or exchange of such capital asset shall be
taken into account in computing net capital gain, net capital loss, and net income.
a. Taxpayer is an individual
o If CA is held for not more than 12 mos. – 100%
o If CA is held for more than 12 mos. – 50%
b. Taxpayer is a corporation – 100% regardless of the holding period

Limitation of deduction of capital losses

 Allowed only to the extent of gains from such sales/exchanges

 If dealings of taxpayer in CA during the year result in a net capital loss, such loss cannot be
deducted from his ordinary income

Exception for banks and trust companies

 If a bank/trust company incorporated under the laws of the PH, a substantial part of whose
business is the receipt of deposits and sells any bonds, debenture, etc. issued by a corporation –
loss resulting from such sale is not subject to the foregoing limitation because securities are
considered ordinary assets of banks & trust companies

Net capital loss carry-over

 If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss
is treated as a loss from sale/exchange of capital asset held not more than 12 mos. in the
succeeding taxable year.
 It cannot exceed the net income (before personal exemptions). Ex. If the net capital loss for the
previous year was P135,000 while the net income (before personal exemptions) was P130,000.
The NCLCO is the lower amount.

Rules on CA transactions of corporations

1. Capital gains/losses is taken into account up to the extent of 100%. Holding period is not
taken into account.
2. Capital losses is allowed only to the extent of capital gains.
3. Corporations cannot carry-over a net capital loss.
 NOTES:

1. Dividends from domestic corporation, interest income on dollar deposits & lotto winnings of
more than P10,000 are subject to FT.
2. VAT is not a deduction from GI. If a taxpayer earns income from lease of bldg. (rent),
depreciation and real property tax on bldg. are deductible.

Treatment of cost and expenses of acquisition and disposition of capital assets

Formula:

Selling price

Less: Expenses

a. Commission
b. Others

Balance

Less: Cost

Acquisition expenses

Gain/loss

NOTES:

a. Expenses of sale should be deducted from selling price.

b. Cost and expenses of acquisition should be capitalized.

Transactions resulting in CG/CL even if there’s no sale of a capital asset

a. Worthless shares of stock – loss shall be considered as loss from the sale/exchange on the last
day of such taxable year of capital assets however such is not deductible against the capital
gains realized from the sale of shares of stock during the taxable year. Instead, such loss must be
claimed against other capital gains.
b. Worthless bonds and other securities – if such are ascertained to be worthless and charged off
within the taxable year and are capital assets, loss shall be considered as loss from the
sale/exchange on the last day of such taxable year of capital assets.
NOTE: Above rule is not applicable to banks & trust companies since securities are considered
ordinary assets of such taxpayers
c. Retirement of bonds – amounts received upon retirement of bonds, debentures, etc. are
considered as amounts received in exchange therefor
d. Option gains/losses – failure to exercise privileges or options is considered as capital
gains/losses
e. Liquidating dividend – gain/loss sustained by the stockholder is a CG/CL. The diff. bet. the sum of
cash and FMV of property received and the cost of the investment in the shares shall represent
CG/CL from investment
  If the investor is an individual, the rule on holding period applies and the percentage of
taxable gain/deductible capital loss depend on the num. of mos. or years the shares
were held. CG/CL derived subject to RIT.

NOTE: Gain realized from a liquidating dividend is subject to ordinary income tax rates and
not CGT on the sale of shares. On the other hand, any loss sustained is first deducted from
CG. The net CG is included in the ITR.

f. Preferred shares redeemed for cancellation or retirement - When preferred shares are
redeemed when the issuing corporation is still a “going concern”, capital gains/losses is
recognized upon redemption which is the diff. bet. the amount received at the time of
redemption and the cost of preferred shares. CG/CL derived therefrom is subject to regular
income tax rates on individuals, or corporate income tax for corporations.
NOTE: This does not cover situations where a corporation voluntarily buys back its own common
shares. Stock transaction tax shall apply if bought in local stock exchange. Otherwise, it is subject
to net CGT.
g. Liquidation of partnership – a partner realizes gain/loss as follows:
Amount received for his interest – Investment - Share in undistributed partnership income
 If partnership distributes its assets in kind and not in cash, the partners realizes gain/loss
according to MV of property received in liquidation
 The share in profits of a GPP shall be reported by partners whether distributed or not.
Hence, share of a partner in the undistributed income has already been subject to tax.
The reason it is allowed to be deducted from the amount is received to avoid double
taxation on said income.
 Interest in a partnership is capital asset. Thus, taxpayer must take into account the
holding period of such asset in the computation of gain/loss. Thus if a partnership is
organized in 2007 and dissolved in 2018, holding period is 11 years which makes taxable
gain/deductible loss subject to 50%,

Gains and losses from short sales

 Gains and losses from short sales of property shall be considered as gains/losses from
sales/exchanges of capital assets
 A short sale is not deemed to be consummated until the delivery of property to cover short sale.

Readjustment of interests in a registered co-partnership

 Facts as to such change/reorganization should be fully set forth in the next return of income, in
order that the Commissioner of Internal Revenue may determine any gain/loss realized by
partner.

Treatment of gain/loss on sale of investment under a functional currency

 If an investor makes an investment in securities denominated in a functional currency (other

than the PH peso), the investor can compute gain/loss from sale of said investment using the
same functional currency.
 If the taxable gain is $2,000, in reporting such gain for tax purposes, the equivalent peso
denomination is the peso equivalent of $2,000 using the exchange rate on the date of the
consummation of transaction.
 Such rule shall also apply to non-resident shareholders of an investee company in the PH.