Capital assets means any form of real property held by the taxpayer

(whether or not connected with his trade or business) which are not
included among ordinary asset classification. In short, the trader doesn’t
use the property for his business.

For tax purposes, there are three (3) general types of capital
assets:

1. shares of stocks of a domestic corporation

2. real property (of individuals) or land or building (of
corporations)
3. other types of assets, including shares of stocks of a foreign
corporation

Ordinary assets are the properties that are used in business or trade by
the taxpayer, or held by the taxpayer for sale to the customer in the
ordinary course of the business.

a. 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

b. property held by the taxpayer primarily for sale to customers in

the ordinary course of his trade or business

c. property used in trade or business, of a character which is

subject to the allowance for depreciation

d. real property used in trade or business of the taxpayer

- any gain resulting from the sale or exchange of an asset is a capital

gain or an ordinary gain depending on the kind of asset involved in
the transaction

- capital gains are gains realized from the sale or exchange of capital
assets

- ordinary gains are gains realized from the sale or exchange of ordinary
assets

- where the real property is located outside the Philippines, the normal
corporate income tax or the graduated income tax rates shall apply,
even though such property is classified as a capital asset (the
preferential rate of 6% applies only when such real property is situated
within the Philippines)

Guidelines

The classification of a taxpayer’s assets would depend on the nature of

their business.

For example, in the case of real estate companies, ordinary business

operations require the possession of properties instead of inventory. Thus,
real properties are considered ordinary assets as they are necessary to
day-to-day (or ordinary) operations.
On the other hand, for any company not primarily engaged in the trade or
selling of properties, these properties are considered capital assets.