GAINS ON DISPOSITION OF PROPERTY

CLASSIFICATION OF ASSETS:

A. Capital Assets are those not falling within the definition of an ordinary asset.

B. Ordinary Assets, on the other hand, means:

1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year;
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
3. Property used in the trade or business, of a character which is subject to the allowance for depreciation;
4. Real property used in trade or business of the taxpayer.

DETERMINATION OF GAIN OR LOSS: the gain shall be the excess of the amount realized from the disposition of property over the basis or adjusted basis
for determining the gain; on the other hand, the loss is the excess of the basis or adjusted basis for determining loss over the amount realized.

Amount realized: is the sum of the money plus the fair market value of the property received.

Amount of cost or basis or adjusted basis of computing gain or loss:

1. Purchase – the cost;
2. Inheritance – fair market value as of the date of acquisition;
3. Gift – the basis is the same as if it would be in the hands of the donor or the last preceding owner who did not acquire the property by gift; however, if
the same exceeds the fair market value at the time of the gift, then for purposes of determining loss, the fair market value.
4. Property acquired for less than an adequate consideration in money or money’s worth – the amount paid by the transferee;

The above amounts are adjusted by amounts of improvements that materially add to the value of the property or appreciably prolong its life less accumulated
depreciation. (RR No. 6-08)

TAX FREE EXCHANGE: No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation is a party to a reorganization
and exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation that is a party to the
reorganization.

Reorganization: includes:
a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or
consolidation; or
b) The acquisition by 1 corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or part of the voting stock of a
corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after the acquisition, the acquiring corporation
has control of such other corporation whether or not such acquiring corporation had control immediately before the acquisition; or
c) The acquisition by 1 corporation, in exchange solely for all or a part of its voting stock or in exchange solely for all or part of the voting stock of a corporation
which is in control of the acquiring corporation, of substantially all of the properties of another corporation. In determining whether the exchange is solely
for stock, the assumption by the acquiring corporation of a liability of the others shall be disregarded; or
d) A recapitalization, which shall mean an arrangement whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority or an
agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporation or both; or
e) A reincorporation, which shall mean the formation of the same corporate business with the same assets and the same stockholders surviving under a new
charter.

Transfer of property in exchange for shares and gains/maintains control: No gain or loss shall also be recognized if property is transferred to a corporation
by a person, alone or together with others, not exceeding 4 persons, in exchange for stock or unit of participation in such a corporation of which as a
result of such exchange the transferor or transferors, collectively, gains or maintains control of said corporation: Provided, That stocks issued for services
shall not be considered as issued in return for property.

Control defined: The term “control”, when used in this Section, shall mean ownership of stocks in a corporation after the transfer of property possessing at least
fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote: Provided, that the collective and not the individual ownership of all
classes of stocks entitled to vote of the transferor or transferors under this Section shall be used in determining the presence of control.

VAT Exemption: Sale or exchanges of property used for business for shares of stocks covered under this subsection shall not be subject to Value-Added
Tax (VAT). Note also, that transactions covered by Sec. 40[C][2] are exempt from VAT under Sec. 109[X] under the Tax Code, as amended by the TRAIN Law.

No BIR Ruling required: In all of the foregoing instances of exchange of property, prior BIR confirmation or tax ruling shall not be required for purposes
of availing the tax exemption. (Sec. 40[C][2], as amended by the CREATE Law)

TREATMENT OF ORDINARY GAINS: or those arising from the sale of ordinary assets will form part of the taxable income subject to the
graduated/basic/regular income tax. Likewise, losses arising from such sale may be claimed as deductible expense, without any limitation as to amount, unlike
in capital losses. (see limitation on capital losses)

TREATMENT OF CAPITAL GAINS: depending on the nature of the property, the gains derived from sale or disposition of capital assets may be subject to:
1. Capital gains tax; or
2. Ordinary income tax.

CAPITAL GAINS TAX: is applicable only to

1. sale of shares of stock of a domestic corporation NOT listed or traded through a local stock exchange held as capital assets; and
2. sale of real property located in the Philippines held as a capital asset.

All other capital gains are subjected to regular income tax.

TRANSACTIONS SUBJECT TO CAPITAL GAINS TAX (CGT)

1. Sale of SHARES OF STOCK of a Domestic Corporation NOT listed and traded through a local stock exchange

Held as capital assets: means all stocks and securities held by taxpayers other than dealers in securities. (Sec. 2[a] of RR No. 6-2008)

Not applicable: the Capital Gains Tax does not apply if the sale of shares of stock was made by
a. A dealer in securities;
b. Investor in shares of stock in a mutual fund company; and
c. Other persons exempt under special law. (Sec. 4 of RR No. 6-2008)

CGT Rate: is now 15%.

Tax base: is the net capital gain, which is the excess of the selling price/fair market value (less cost to sell) over the cost of the shares.

Determination of fair market value: the value of the shares of stock at the time of sale shall be the fair market value. In determining the value of the
shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus
the liability values is the indicated value of the equity. The appraised value of real property at the time of sale shall be the highest of –

(1) The fair market value as determined by the Commissioner, or

(2) The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or
(3) The fair market value as determined by Independent Appraiser.

However, under RR No. 20-2020, the fair market value of shares of stock not listed or traded in a local stock exchange are now as follows:
1. Common shares – book value based on the latest available statements duly certified by an independent public accountant prior to the date of sale, but not
earlier than the immediately preceding taxable year.
2. Preferred shares – the liquidation value, which is equal to the redemption price of the preferred shares as of balance sheet date nearest to the transaction
date, including any premium and cumulative preferred dividends in arrears.

In case of both common and preferred shares: the book value per common share is computed by deducting the liquidation value of the preferred shares
from the total equity of the corporation by dividing the result by the number of outstanding common shares as of balance sheet date nearest to the
transaction date.

No more adjustment to fair market value: the book value of the common shares of stock or the liquidation value of the preferred shares of stock, need
not be adjusted to include any appraisal surplus from any property of the corporation not reflected or included in the latest audited financial statements,
in order to determine the fair market value of the shares of stock. The latest audited financial statements shall be sufficient in determining the fair market value
of the shares of stock subject of the sale, barter, exchange, or other disposition.

ILLUSTRATION: Assume that Mr. A sold 10,000 shares in X Corporation on June 30, 2020. The corporation’s accounting period is on a calendar year basis.
In this case, the book value as the fair market value of the shares of stock in X Corporation shall be determined based on its audited financial statements for
year ending December 31, 2019, since the audited financial statements for taxable year 2020 is not yet existent as of the date of the sale of shares.

Assume further that based on the audited financial statements as of December 31, 2019, the total assets of X Corporation are Php50,000,000 while its
liabilities are Php20,000,000 resulting to an equity of Php30,000,000. Its outstanding shares are 200,000. For this purpose, the net book value as the fair
market value of each share shall be computed as follows:

P30,000,000 equity
= P150 (per share)
200,000 outstanding shares

In this case, the net book value of the shares of stock in X Corporation based on its latest audited financial services shall be Php150 per share. As such, the
fair market value of the shares of stocks in X Corporation shall be Php150 per share.

Shares listed or traded through the stock exchange: if the shares are disposed through the stock exchange, the same is not subject to CGT but to the
Stock Transaction Tax of 6/10 of 1% of the selling price (prior to the TRAIN, the rate was ½ of 1%), which is a business tax (this is part of the discussion in
Percentage Taxes). However, this tax constitutes the final tax on such sale since the Tax Code provides that the same shall be exempt from income tax. Thus,
any gain resulting from such disposition will no longer be included in the taxpayer’s gross income subject to regular income tax.

However, if the shares, although listed in the stock exchange, are sold over-the-counter, or directly to the buyer, and not through such stock exchange, then it
will still be subject to the CGT.

Not subject to the Capital Gains Tax:

a. The sale is made through the local stock exchange;
b. The shares of stock are of a foreign corporation (not domestic corporations);
c. The shares are NOT held as capital assets, e.g., the seller is a dealer in securities.
d. The sale resulted in a capital loss.

2. Sale of REAL PROPERTY located in the Philippines held as a capital asset

A 6% CGT is imposed on the presumed gain from sale of real property, based on the gross selling price or the fair market value, whichever is higher.

Fair Market Value: shall be the higher between:

a. Zonal Value as determined by the BIR;
b. Fair Market Value per local assessor.

Note: for individuals, real property subject to CGT consists of ALL real properties (classified as capital assets); whereas for domestic corporations, the only real
property subject to capital gains tax are LANDS and/or BUILDINGS. Sale of machineries, even though classified as a capital asset, shall be subject to the regular
corporate income tax.
Sale of real property to government or any of its political subdivisions or agencies or GOCCs may be treated as subject to capital gains tax or ordinary income
tax, at the option of the taxpayer. (Sec. 22[D] of the Tax Code)

Sale of Principal Residence: sale of principal residence of natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal
residence within 18 calendar months from the date of sale or disposition is not subject to the 6% CGT. Subject to the following requirements:
a. The historical cost or adjusted basis of real property sold or disposed is carried over to the new principal residence;
b. The exemption can only be availed once every 10 years;
c. The BIR is notified by the taxpayer within 30 days from the date of sale or disposition of his intention to avail of the tax exemption.

If there is no full utilization of the proceeds, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to the 6%
CGT, as follows:

Unutilized Portion
Taxable Amount = X CGT base*
Gross Selling Price

*CGT base is the higher between the FMV and the Selling Price.

The CGT then would be 6% of the Taxable Amount computed above.

ILLUSTRATION: Mr. F sold his principal residence which he acquired for P1,000,000 for P3,000,000. At the time of sale, the fair market value is P2,500,000.
After 1 year, Mr. F bought a house and lot for P3,200,000.

Assuming all other requisites are present, how much is the CGT due on the sale?

Answer: P0. The proceeds of P3,000,000 was fully utilized to acquire a new principal residence.

If, however, the new principal residence was acquired for only P2,000,000, how much is the CGT?

Answer: P60,000, computed as follows:

1,000,000
X 3,000,000 = 1,000,000 * 6% = P60,000
3,000,000

1. Unutilized Portion is 1,000,000 (3,000,000 selling price less the utilized portion of 2,000,000)
2. CGT Base is P3,000,000 (the higher between the selling price and fair market value)
3. Taxable Amount is P1,000,000, the ratio of unutilized portion over the selling price multiplied by the CGT base
4. CGT, therefore, is P60,000, 6% of the taxable amount.

If, however, fair market value of the principal residence was P3,300,000, how much is the CGT?

Answer: P66,000, computed as follows:

1,000,000
X 3,300,000 = 1,100,000 * 6% = P66,000
3,000,000

1. Unutilized Portion is P1,000,000 (3,000,000 selling price less the utilized portion of 2,000,000)
2. CGT Base is P3,300,000 (the higher between the selling price and fair market value)
3. Taxable Amount is P1,100,000, the ratio of the unutilized portion (P1,000,000) over the selling price (P3,000,000). Note that the denominator is ALWAYS
the selling price (and not the fair market value) because this is the total amount which can possibly be utilized for the acquisition or construction of a
new principal residence considering that this will be the total amount of proceeds that will be collected from the buyer.
4. CGT, therefore, is P66,000, 6% of the taxable amount.

Real Property located abroad: is not subject to CGT. Note that what is subject to the 6% CGT is sale of real property LOCATED IN THE PHILIPPINES. Thus, if
the property is located abroad, gain from such disposal, if taxable in the Philippines (if sold by a resident citizen or domestic corporation), is subject to regular
income tax.

Forced Sale of Real Property: the fact that the sale is involuntary, e.g., from a court order of foreclosure sale, does not affect the classification of the property
in the hands of the seller, either as capital asset or ordinary asset, and are thus subject to the rules applied therefor.

CAPITAL GAINS NOT SUBJECT TO CGT; SUBJECT TO REGULAR INCOME TAX: Note that the CGT applies only to two disposals of two classes of assets,
i.e., real property and shares of stock of a domestic corporation not listed or traded in the local stock exchange. Thus, if a capital asset, not among the said two
classes, resulted in a gain, they are considered “capital gains” still but subject to regular income tax.

Transactions resulting in capital gains and losses even if no sale of capital assets include:
1. Retirement of bonds: amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness
issued by a corporation with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

2. Short sales of property – gains or losses from short sales of property shall be considered as gains or losses from exchanges of capital assets.

Short sale: is a transaction in which the speculator sells securities which he does not own (he merely borrows the stock certificate through or from his stock
broker) in anticipation of a decline in its price, and within a reasonably short period of time buys or covers the stock to complete the transaction.

3. Option gains and losses – an option is a contract granting a person the exclusive privilege to buy or not to buy certain objects at any time within the
agreed period at a fixed price. It is a contract different from the contract which the parties may enter into; it is one supported by a consideration (called
option money) which is distinct from the purchase price.
 The law considers the option or the privilege as the capital asset itself.

Thus, if X wanted to buy the cellphone of A, and gave P100 as option money to decide within 3 days, but forfeits the same, the P100 is considered capital
loss of X and A likewise recognizes a capital gain of P100.

4. Securities becoming worthless – loss from shares of stock, held as capital asset, which have become worthless during the taxable year shall be treated
as capital loss at the end of the year. However, this loss is not deductible against the capital gains realized from the sale, barter or exchange or other forms
of disposition of shares of stock during the taxable year, but must be claimed against other capital gains to the extent of capital gains. (RR No. 6-2008)
Note that in order to be subject to 5% and 10% CGT (now 15% CGT), there must be actual disposition of the shares of stock.

5. Liquidating Dividends - Upon surrender by the investor of the shares in exchange for cash and property distributed by the issuing corporation upon its
dissolution and liquidation of all assets and liabilities, the investor shall recognize either capital gain or capital loss upon such surrender of shares computed
by comparing the cash and fair market value of property received against the cost of the investment in shares. The difference between the sum of the
cash and the fair market value of property received and the cost of the investment in shares shall represent the capital gain or capital loss from the
investment, whichever is applicable. (Sec. 8, RR No. 6-08)

In case the distribution is in instalments: the first payments are applied against the cost. The gain is returnable only when he has completely recovered.
The loss can be taken only upon the distribution of the final liquidating dividend.

6. Retirement or Redemption for Cancellation of Preferred Shares - when preferred shares are redeemed at a time when the issuing corporation is
still in its "going-concern" and is not contemplating in dissolving or liquidating its assets and liabilities, capital gain or capital loss upon redemption shall be
recognized on the basis of the difference between the amount/value received at the time of redemption and the cost of the preferred shares.

This, however, does not apply if a corporation acquires its own shares and books it as treasury shares. (Sec. 9, RR No. 6-08)

RULES APPLICABLE TO CAPITAL GAINS:

1. Percentage taken into account (holding period rule):The following percentages of the gain or loss recognized upon the sale or exchange of capital
assets shall be taken into account in computing net capital gain, loss or net income:

Percentage Applicability
100% If the capital asset has been held for NOT more than 12 months;
50% If the capital asset has been held for MORE than 12 months.
(Sec. 39[B] of the Tax Code)

This rule is not applicable to corporations and is not applicable to the net capital loss carry-over (under 3 below).

2. Limitation on Capital Losses: The capital losses realized during the taxable year are deductible only to the extent of capital gains from the same type
of transaction during the same period. This rule likewise applies to sales of shares of stock subject to 15% CGT.

Exception: banks and trust companies whose business is the receipt of deposits, sells any bond, debenture, note or certificate or other evidence of
indebtedness. Any loss resulting from such sale shall not be subject to the foregoing limitation and not included in determining the applicability of such
limitation to other losses. (Sec. 39[C] of the Tax Code)

3. Net Capital Loss Carry-Over: If the individual sustains in any taxable year a net capital loss, such loss, in an amount not to exceed the net income of
such year, shall be treated in the succeeding taxable year as a loss from the sale or exchange of asset held for not more than 12 months. (Sec. 39[D] of
the Tax Code)

This rule is likewise not applicable to a corporation.

4. Sale of shares of stock subject to 15% CGT: For sale, barter, exchange or other forms of disposition of shares of stock subject to the 15% capital
gains tax, if the transferor of the capital asset is an individual, the rule on holding period and capital loss carry-over will not apply.

FILING OF THE CAPITAL GAINS TAX RETURN

1. Shares of stock – 30 days after each transaction using BIR Form No. 1707; the consolidated return shall be filed on or before April 15 of the following year.
2. Real Property – 30 days following each sale or other disposition using BIR Form No. 1706.

Real Property subject to regular income tax: If the sale of real property is subject to regular income tax, the same shall likewise be subject to CREDITABLE
WITHHOLDING TAX, and such withholding tax shall be remitted on the 10th day following the month of transaction using BIR Form No. 1606.