CAPITAL GAINS TAXATION

Capital Gains Tax is a tax imposed on the gains presumed

to have been realized by the seller from the sale, exchange,
or other disposition of capital assets located in the
Philippines, including pacto de retro sales and other forms
of conditional sale.
Capital assets –any asset other than ordinary assets

Ordinary assets are: assets used in business such as:

a) Stock in trade of the taxpayer or other property of a kind which would properly be
included in an inventory of the taxpayer if on hand at the end of the taxable year.
b) Properties held by the taxpayer primarily for sale to customers in the ordinary course of
trade or business
c) Properties used in trade or business of a character which is subject to allowance for
depreciation and
d) Real properties used in trade or business.
Ex. Inventories, property and equipment
Capital assets are: any other assets that does not fall under the definition of
ordinary assets

• Personal (non-business) assets of individual taxpayers

• Business assets of any taxpayers which are:
-Financial assets such as cash, receivables, prepaid expenses and investments
-Intangible assets such as patent, copyrights, leasehold rights, franchise rights

• Gains arising from sale of ordinary assets are called “ordinary gains”. Gains
arising from sale of capital assets are called “capital gains.”
• All ordinary gains are taxable under regular income taxation.
• Capital gains are taxable either under final capital gains tax or under regular
income tax.
ANALYSIS OF PROPERTIES HELD BY TAXPAYER

INDIVIDUAL
TAXPAYERS

Personal Asset
Business
(all are capital Asset
assets)

Ordinary
Capital assets
assets
 Corporate
Taxpayers

Ordinary Capital
Assets Assets
 TYPES OF GAINS SUBJECT TO CAPITAL GAINS TAX

1.Capital gains on the sale of domestic stocks sold directly

to buyer

2.Capital gains on the sale of real properties not used in

business.
 SCOPE OF CAPITAL GAINS TAXATION
Gains on Dealings in Capital Tax Rates
Assets
Gain on the sale, exchange, and other 15% of capital gains tax
disposition of domestic stocks directly
sold to buyer
Gain on the sale, exchange, and other 6% capital gains tax
disposition of real property in the
Philippines
Gains from other capital assets Regular income tax
Capital Gains Subject to Final Tax
A. Capital gains tax on sale, barter, exchange and other disposition
of domestic shares of stock directly to buyer
Requisites:
1) There is a net gain
2) The capital asset sold is a domestic stock.
3) The sale is made directly to buyer.

Capital Gains Tax Rates: 15%

Note: This rule on capital gains on sale of domestic stocks directly to buyer is
uniform to all income taxpayers (individuals or corporate) regardless of
classification
CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER DISPOSITION OF
DOMESTIC STOCKS DIRECTLY TO BUYER

Domestic stocks are evidence of ownership or rights to ownership in

a domestic corporation regardless of its features, such as:
1.Preferred stocks
2.Common stocks
3.Stock rights
4.Stock options
5.Stock warrants
6.Unit of participation in any association, recreation or amusements
club
CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER DISPOSITION OF
DOMESTIC STOCKS DIRECTLY TO BUYER

MODES OF DISPOSING DOMESTIC STOCKS

Shares of stocks may be sold, exchange or disposed:
1.Through the Philippine Stock Exchange (PSE)
2.Directly to buyer
CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER DISPOSITION OF
DOMESTIC STOCKS DIRECTLY TO BUYER

Sold Directly to the Buyer

The net gain is determined as follows

Selling price Pxxxx
Less:
Basis of stocks disposed Pxxx
Selling expense xxx
Doc stamp xxx xxxx
Net Capital Gain Pxxxx
CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER DISPOSITION OF
DOMESTIC STOCKS DIRECTLY TO BUYER

Selling price shall mean:

* In case of cash sale, the total consideration received per deed of sale

* If total consideration is paid partly in money and partly in property, the sum of
money and fair value of property received.

* In case of exchanges, the fair value of the property received.

What is the tax basis of stocks?

1.If acquired by purchases- tax basis is the cost of the property which will determined by the
following methods:
A.Specific identification
B.Moving average method
C.First in-first out method
2.If acquired by devise, bequest or inheritance - tax basis is the fair value at the time of death
of the decedent.
3. If acquired by gift - the tax basis is the lower of the fair market value at the time of gift and
the basis in the hands of the donor or the last preceding owner by whom it was not
acquired by gift.
4. If acquired for inadequate consideration - the tax basis is the amount paid by the transferee
for the property
5. If acquired under tax-free exchanges - the tax basis is the substituted basis of the stocks
Illustration:
Mr. Cool sold his stocks receiving in exchage a building with a tax basis of
P2,000,00 but with a fair value of P2,500,000, goods worth P100,000 and
P400,000 cash.

The selling price shall be:

The fair value of building received P2,500,000

Fair value of goods received 400,000
Cash 100,000
Total P3,000,000
Joy sold domestic shares directly to buyer. the following relates to the sale:

Fair market value of shares P400,000

Selling Price 300,000
Cost 150,000
Compute the capital gains tax.
Answer:
Selling Price P300,000
Less Cost 150,000
Net Capital Gain P150,000
Multiply by: Capital gains tax rate x 15%
Capital gains Tax P22,500
Josie sold 1,500 shares of stocks of Jeran Corp directly to a
buyer. The share's par value per shares was P85. Josie
purchased the share for P90 each. On the date of sale, the
shares had a selling price of P120 per share. What is the
capital gains tax on the sale?
Answer:
Selling price (P120 x 1500sh) P180,000
Cost (P90 x 1500sh) 135,000
Net capital gain P45,000
x 15%
Capital gains tax P6,750
Thru PSE
Illustration (Non-dealer)
Mr. Santos, not a dealer in stocks, sold the following stock
investments through the PSE:
Date Stock Code Selling Cost Gain/(Loss)
Price
4/5/2020 AC P4,000,000 P3,700,000 P300,000
4/5/2020 SMB 3,000,000 3,200,000 (200,000)
Total P7,000,000 P6,900,000 P100,000

The stock transaction tax shall be computed as follows:

Total selling prices of stocks thru PSE P7,000,000

Multiply by: transaction tax rate x 0.6%*
Transaction tax P42,000

* 60% of 1% of the selling price

Drill Problems
For each of the following scenarios, compute the capital gains tax

Illustrative Cases CGT

1. Andy sold domestic stocks through the PSE at a gain of P400,000
2. Andy, a security dealer sold domestic stocks directly to a buyer at a gain of
P400,000
3. ABC Inc. sold domestic stocks directly to a buyer at a gain of P400,000
4. Andy purchased domestic stocks for 1M and sold the same for P1.8M. At
the date of sale the stock has a fair value of P2.4M
Illustrative Problem
Arnold, a resident alien taxpayer, made the following dispositions of shares of stock during 2020:

Date Security Selling Price Cost Settlement Mode CGT

1/18/20 Domestic common P400,000 P120,000 Directly to buyer
stocks P42,000
2/12/20 Domestic Bonds 200,000 180,000 Directly to buyer Subject to RIT
3/14/20 Domestic Preferred 280,000 250,000 Thru PSE Stock Transaction
Stocks Tax
6/18/20 Domestic Stock options 150,000 120,000 Directly to buyer P4,500
9/24/20 Domestic preferred 280,000 300,000 Directly to buyer
stocks Zero
12/11/20 Domestic preferred 400,000 360,000 Directly to buyer P3,000
stocks

Required: Compute the capital gains tax payable per transactions

 Installment CGT
• On July 1, 2020, Jordan sold his domestic stocks with aggregate par value
of P250,000 and acquisition cost of P300,000 to Karl for P500,000. Karl
made a down payment of P50,000 and signed a note for the balance payable
in 9 semi-annual installments starting December 31, 2020.
• Compute the 2020 capital gains tax.
2020:
Selling Price P500,000
Initial payment/ Selling Price
Cost 300,000
100k/500k = 20%
Net capital gain P200,000
Tax rate 15%
July 2020 = P50k/500k x P30,000
Net capital gains P30,000
Dec 2020 = P50k/500k x P30,000

Total CGT 2020: P6,000

Wash Sales
Wash sale of securities is deemed to occur when within 30
days before and 30 days after the losing sale of securities
(also referred to as the 61 day period), the taxpayer
acquired or entered into a contract or option to acquire the
same or substantially identical securities. Capital losses on
wash sales by non-dealers in securities are not deductible
against capital gains because they are effectively
unrealized.
 Wash Sales
A wash sale of domestic shares wherein 20,000 shares were
disposed at a loss of P40,000 were subsequently covered up within
30-day period by a purchase of 15,000 shares for P12/share.

Deferred Capital loss: 15,000 sh/ 20,000 sh x P40,000 = P30,000

Deductible capital loss: 5,000 sh/20,000 sh x P40,000 = P10,000

The adjusted basis or cost of the shares acquired shall be:

15,000 shares x P12 = P180,000

Add: Deferred loss 30,000
Basis of 15,000 shares P210,000
CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER DISPOSITION OF
REAL PROPERTY CLASSIFED AS CAPITAL ASSET LOCATED IN THE
PHILIPPINES

The sales, exchange and other disposition of real property

capital assets is subject to a tax of 6% the selling price or
the fair value, whichever is higher.

What is the basis in the valuation of real property?

A.Zonal Value- prescribed by the Commissioner of Internal
Revenue
B. Fair Market Value- as shown in the schedule of market
values of the Provincial or City Assessor’s Office.
 CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER DISPOSITION OF
REAL PROPERTY CLASSIFED AS CAPITAL ASSET LOCATED IN THE
PHILIPPINES

Illustration:
Terry sold a vacant agricultural land for P5,000,000. The land was
purchased by Terry at P4,000,000 and had an appraisal value of
P8,000,000 and zonal value of P7,000,000. The property had a fair
value of P6,000,000 in the Provincial Assessor’s Office and an
assessed value of P2,400,000.
 The highest of the selling price (5M), zonal value (7M) and
Assessor’s fair value (6M) is the P7,000,000 fair value. Hence, the
capital gains tax would be computed P7,000,000 x 6%; hence,
P420,000.
Anna sold her residential house and lot for P5,000,000.
Anna purchased the lot when it was worth P1,000,000 and
constructed on it the house at total cost of P2,500,000.
The following fair value details were available for the
property:
BIR zonal value Assessor's vauation
Zonal Value Fair value Assessed value
Lot P4,000,000 P3,500,000 P800,000
House n/a 2,000,000 1,200,000
 Zonal Value Assessor's Fair Fair Value
Value
Land P4,000,000 P3,500,000 P4,000,000
House 0 2,000,000 2,000,000
(improvement)
Total Fair value P6,000,000
(Higher)
Between Fair value
and Selling price
Multiply bu: CGT x 6%
rate
Capital gains tax P360,000
 Nature of the 6% Capital Gains Tax
1. Presumption of capital gains- the 6% capital gains tax
applies even if the sale transaction resulted to loss. The
basis of taxation is the selling price or fair value whichever
is higher, not the actual gain.

2. Non-consideration to the involuntariness of the sale

3. Final tax- shall be withheld by the buyer against the

selling price of the seller and remit the same to the
government
 SCOPE and APPLICABILITY of the 6% CAPITAL GAINS
TAX
Location of thae TAXPAYERS
Property Individuals Corporations
Within the All individuals Domestic
Philippines Corporation only
Outside the Not applicable Not applicable
Philippines
Anderson disposes a vacant lot for P3,000,000. The lot has
an Assessor's fair value of P2,800,000, a zonal value of
P3,200,000 and an appraisal value of P3,500,000.
What is the capital gains tax?

Answer: Higher P3,2000,000

CGT rate x 6%
Capital gains tax P192,000
A resident citizen taxpayer sold a parcel of land used in his
trading business. Selling price is P3,500,000. The property
was acquired five years ago at P2,000,000.

Capital gains tax = P-0-

*The property pertains to an ordinary asset, hence not
subject to capital gains tax. The difference of P1,500,000 is
included in the determination of gross income subject to
basic or regular income tax.
 EXEMPTIONS TO THE 6% CAPITAL
GAINS TAX
1. ALTERNATIVE TAXATION RULE
- an Individual seller of real property capital assets has the
option to be taxed either
a. 6% capital gains tax or
b. The regular income tax
- if the buyer is the government,its instrumentalities or
agencies including government-owned and controlled
corporations
 EXEMPTIONS TO THE 6% CAPITAL
GAINS TAX
2. EXEMPTION RULES UNDER THE NIRC
The exchange, sale and other disposition of a principal
residence for the re-acquisition of a new principal residence
by individual taxpayers is EXEMPT from the 6% capital
gains tax.
Principal residence means the house and lot which is the
primary domicile of the taxpayer. If the taxpayer has
multiple residences, his principal residence is deemed that
one shown in his latest tax declaration.
Requisite of Exemption

1) The seller must be a citizen or resident alien

2) The sale involves the principal residence of the seller- taxpayer.
3) The proceeds of the sale is utilized in acquiring a new principal
residence
4) The BIR is duly notified by the taxpayer of his intention to avail of the tax
exemption within 30 days of the sale thru a prescribed return.
5) The reacquisition of the new residence must be within 18 months from
the date of sale.
6) The capital gain is held in escrow in favor of the government.
7) The exemption can only be availed of once in every 10 years.
8) The historical cost or adjusted basis of the principal residence sold shall
be carried over to the new principal residence built or acquired.
Chel, a resident citizen, sold his residential house and lot (principal
residence) in the Philippines with the following data:
Selling Price P4,000,000
Assessed Value 6,000,000
Zonal Value 5,000,000
Expenses on the sale 125,000

Q1. Assuming Chel bought a new principal residence for P4,000,000, how
much is the applicable CGT?
Answer: P0
Chel, a resident citizen, sold his residential house and lot (principal
residence) in the Philippines with the following data:
Selling Price P4,000,000
Assessed Value 6,000,000
Zonal Value 5,000,000
Expenses on the sale 125,000

Q2. Assuming Chel bought a new principal residence for P8,000,000, how
much is the applicable CGT?
Answer: P0
Chel, a resident citizen, sold his residential house and lot (principal
residence) in the Philippines with the following data:
Selling Price P4,000,000
Assessed Value 6,000,000
Zonal Value 5,000,000
Expenses on the sale 125,000

Q3. Assuming Chel bought a new principal residence for P2,000,000, how
much is the applicable CGT?
Answer: P180,000
P2M/4M x P6M x 6% = P180,000
 EXEMPTIONS TO THE 6% CAPITAL
GAINS TAX
3. EXEMPTION RULES UNDER SPECIAL LAWS

a. Sale of land pursuant to the Comprehensive Agrarian

Reform Program
b. Sale of socialized housing units ny the National Housing
Authority