PHILIPPINE COLLEGE OF BUSINESS AND ACCOUNTANCY

CONCORDIA SUR, NUEVA VALENCIA, GUIMARAS

INCOME TAXATION 1
CAPITAL GAINS/LOSS SUBJECT TO BASIC INCOME TAX
NET CAPITAL LOSS CARRY-OVER

CAPITAL Gains Subject to Ordinary or Basic Income Tax

All other capital asset transactions other than assets subject to percentage taxes and capital gains
taxes may result to either capital gains or capital losses which are subject to basic tax.

RULES IN THE RECOGNITION OF CAPITAL GAINS AND LOSSES

1. The transaction must involve property classified as capital asset.
2. The transaction must arise, generally, from sale or exchange.
3. Net capital gains are added to ordinary gains. However, if the result is a net capital loss, such
loss can only be deducted from the capital gain. This is to insure that only costs or expenses
incurred in earning the income shall be deductible from income tax purposes consonant with the
requirement of the law that only necessary expenses are allowed as deductions from gross
income.

HOLDING PERIOD
 DEFINITION: Holding Period refers to the length of time the asset was held by the taxpayers.
 NOTE: This rule is applicable only to individual taxpayers. It covers the period from the date
of acquisition to the date of sale or exchange. The amount of capital gains and losses will
depend on the length of the time the asset was held by the individual taxpayer as follows:

Holding Period Percentage to be recognized

 12 months or less 100%
 More than 12 months 50%

 The entire amount of capital gains and losses incurred by corporations shall be recognized
regardless of the holding period. However, the rule that capital losses are recognized only to
the extent of capital gains shall likewise apply to corporate taxpayers.

Net Capital Loss Carry-over

 This rule is applicable only to individual taxpayers.
 If an individual taxpayer sustains in any taxable year a net capital loss, such loss shall be
treated in the succeeding year as a short term capital loss. Meaning, it can be deducted
against net capital loss in the year immediately following the year when a net capital loss was
incurred.
 The amount that can be deducted from the net capital gain of the succeeding year should be in
the excess of the net income at the time the capital loss was incurred OR the actual net capital
loss whichever is lower.

DEFINITION OF TERMS (RR7-2003) - used in solving for CG and CL subject to BASIC

INCOME TAX
A. Capital gain
- Gain from the sale, exchange, or other disposition of capital asset.

B. Capital loss
- Loss from sale, exchange, or other disposition of capital asset.

C. Net Capital Gain

- Excess of gains from sale or exchanges of capital asset over losses from such sale or
exchanges.

D. Net Capital Loss

- Excess of loss from sale or exchanges of capital asset over gains from such sale or
exchanges.
E. Ordinary Gain
- Gain realized from the sale or exchange of ordinary asset including gains from
performance of services and business.

F. Ordinary Loss
- Loss incurred from the sale/exchange of ordinary asset. (It also means the excess of
deductions over the gross income of a taxpayer during a taxable year, or net operating
loss).

G. Dealers in Securities
- All persons, who for their own account are engaged in the sale of stock, bonds,
exchanges, bullions, coined money, bank notes, or other securities as licensed by the
SEC.

CASE A (Holding Period-Individual Taxpayer):

An individual taxpayer, single, has the following data for 2018 taxable year:

Ordinary income P240,000

Ordinary loss 40,000
Capital gain on capital asset held for six (6) 10,000
months
Capital gain capital asset held for three (3) 40,000
years
Capital loss on capital asset held for 15 10,000
months

Question: How much is the net taxable income?

CASE B (Holding Period-Corporate Taxpayer):

Assume the same data in Case A, except that the taxpayer is a corporation.
Determine the taxable income of the corporation

CASE C (Holding period & Net Capital “Loss”-Individual Taxpayer):

An individual taxpayer, single has the following data for 2018:
Ordinary income P240,000
Ordinary loss 40,000
Capital gain on capital asset held for six (6) 10,000
months
Capital gain capital asset held for three (3) 40,000
years
Capital loss on capital asset held for 15 80,000
months

Question: How much is the net taxable income?

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CASE D (Net Capital “Loss” Carry Over- Individual Taxpayer):
Given the following data during the calendar year (2018), determine the taxable income assuming
the taxpayer is a citizen of the Philippines without a dependent child.

Business income P800,000

Business expenses 500,000
Compensation income 500,000
Capital gain on sale of bonds held for twenty (20) months 60,000
Capital gain on direct sale to a buyer of shares of domestic 150,000
corporation held for six (6) months
Capital loss on sale of a car held for ten (10) months 50,000
Capital loss on sale of land in the Philippines held for two 100,000
(2) years
Capital loss in 2017 (net taxable income in 2017 was 200,000
P100,000)

CASE E (Net Capital “Loss” Carry Over – Individual Taxpayer):

Given the following data during the calendar year (2018), determine the taxable income assuming
the taxpayer is a citizen of the Philippines without a dependent child.

Business income P800,000

Business expenses 500,000
Compensation income 500,000
Capital gain on sale of bonds held for twenty (20) months 60,000
Capital gain on direct sale to a buyer of shares of domestic 150,000
corporation held for six (6) months
Capital loss on sale of a car held for ten (10) months 10,000
Capital loss on sale of land in the Philippines held for two 100,000
(2) years
Capital loss in 2017 (net taxable income in 2017 was 200,000
P100,000)

CASE F (Taxpayer- Domestic Corporation):

Given the following data during the calendar year (2018), determine the taxable income assuming
the taxpayer is a “domestic corporation”.

Business income 800,000

Business expenses 500,000
Capital gain on sale of bonds held for two (2) months 70,000
Capital gain on direct sale to buyer of shares of domestic 150,000
corporation held for six (6) months
Capital loss on sale of a car held for two (2) years 10,000
Capital loss on sale of land in the Philippines held for two 100,000
(2) years
Capital loss in 2017 (net taxable income in 2017 was 200,000
P50,000)

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 Capital GAINS subject to percentage taxes
 Beginning January 1, 2018, a “Percentage tax” of 6/10 of 1% of the gross selling price or gross
value in money of shares of stock sold, bartered, or exchange through the local stock exchange
(Listed Shares) also known as Stock Transaction Tax. The following sellers or transferors of
stock are liable to this tax:
a) Individual taxpayer, whether citizen or alien.
b) Corporate taxpayer, whether domestic or foreign.
c) Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust
funds, and pension funds, among others.

 The shares of stock referred to above pertains to shares of stock held as capital assets.
 The seller should not be a dealer in securities, otherwise, the sale is subject to basic income tax
as well as value added tax.
 Since the basis of the tax is gross selling price, any gain or loss from sale or exchange is ignored.
Therefore, regardless of whether the transaction is resulted in the realization of profit or loss, as
long as the transaction occurred referring to a sale or exchange of shares of stock held as capital
asset in a local stock exchange, it is subject to a percentage tax of 6/10 of 1% gross selling price.
 The stockbroker who effected the sale shall collect the tax from the seller and remit the same to the
collecting bank within five (5) banking days from the date of collection thereof.

George sold 2,000 shares of a domestic corporation in a local stock exchange at 110 per
share (Acquisition cost –P100 per share).
1. How much is the capital gains tax on the sale of shares?
2. How much is the income subject to basic or ordinary tax?
3. What is the applicable tax on the transaction?
Assume that George is a dealer in securities, determine the OPT for the said transaction.

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