Gains Derived From Dealings In Property – Dealings in property such as

sales or exchanges may result in gain or loss.

WHAT ARE CAPITAL ASSETS?
The NIRC defines a capital asset in a negative way.
The term capital assets means property held by the taxpayer (whether
or not connected with his trade or business) but does not include the
following ordinary assets.
TAX TREATMENT OF CAPITAL GAINS
CAPITAL GAINS SUBJECT TO CAPITAL GAINS
TAX

CAPITAL GAINS THAT GOES INTO THE

COMPUTATION OF TAXABLE INCOME
 Tax Rate on Capital Gains
1. On sale of shares of stock of a 15% of the net capital gains
domestic corporation NOT TRADED
through a local stock exchange held as
capital asset
2. On sale of real property in the 6% of the gross selling price, or the
Philippines held as capital asset (See current market value at the time of sale,
RR 8-1998) whichever is higher.
 Tax Rate on Income from Sale, Barter, Exchange or
other Disposition of Shares of Stock
1. On sale of shares of stock of a 15% of the net capital gains
domestic corporation NOT TRADED
through a local stock exchange

2. If shares of stock are LISTED AND 6/10 of 1% of the gross selling price or
TRADED through the local stock gross value in money of the shares of
exchange stock (Stock Transaction Tax)*

*whether the sale resulted to a gain or

not
CAPITAL GAINS THAT GOES INTO THE
COMPUTATION OF TAXABLE INCOME

The kind of property involved (i.e., whether the property

is a capital asset or an ordinary asset) determines the
tax implication and income tax treatment, as follows:
2019 BAR

GHI INC., is a corporation authorized to engage in the business of

manufacturing ultra-high density microprocessor unit packages. After its
registration on July 5, 2005, GHI, Inc. constructed buildings and purchased
machineries and equipment. As of December 31, 2005, the total cost of the
machineries amounted to Php 250,000,000.00. However, GHI Inc. failed to
commence operations. Its factory was temporarily closed effective September
15, 2010. On October 1, 2010, it sold its machineries and equipment to JKL
Integrated for P 300,000,000.00. Thereafter, GHI Inc was dissolved on November
30, 2010.

a. Is the sale of machineries and equipment to JKL subject to normal corporate

income tax or capital gains tax?
CAPITAL GAINS AND LOSS
PERCENTAGE AND
HOLDING PERIOD
RULES
SUMMARY OF RULES
EXAMPLE A
EXAMPLE A
(HOW TO SOLVE FOR TAXABLE INCOME)
EXAMPLE B
EXAMPLE B
(HOW TO SOLVE TAXABLE INCOME)
EXAMPLE C
CORPORATION
EXAMPLE C
CORPORATION
2012 BAR
Mr. Aguirre, a RC, is working for a large real estate development
company in the country and in 2010, he was promoted to Vice President of
the company. With more responsibilities comes higher pay. In 2011, he
decided to buy a new car worth P 2M and he traded his old car with a
market value of 800,000 and paid the difference of 1,200,000 to the car
company. The old car which was bought three years ago by his father at
Php 700,000 was donated by him and registered in the name of his son.
The corresponding donor’s tax thereon was duly paid by his father.

Q1: How much is the cost basis of the old car?

Q2: Is the old car capital asset or ordinary asset?
Q3: Is Mr. Aguire liable to pay income tax on the gain from the sale of the
old car?
GENERAL RULE: UPON THE SALE OR EXCHANGE OF PROPERTY, THE ENTIRE
AMOUNT OF THE GAIN OR LOSSS AS THE CASE MAY BE, SHALL BE
RECOGNIZED.

EXCEPTION:

TAX EXEMPT OR TAX FREE SALES OR EXCHANGES (PRIOR TO CREATE)

NO GAIN, NO LOSS RECOGNIZED (SEC. 40 C (2))
EXCHANGE OF PROPERTY

1. Between corporations which are parties to the merger or consolidation

(Property for stock)
2. Between a stockholder of a corporation party to a merger or
consolidation and the other party corporation (Stock for Stock)
3. Between a security holder of a corporation party to the merger or
consolidation and the other corporation (Securities for Securities or Stock)
4. Transfer or exchange of property for stock resulting in acquisition of
corporate control (Property for Stock)
PROPERTY FOR STOCK

No gain or loss shall ALSO be recognized if property is

transferred to a corporation by a person in exchange for
stock or unit of participation in such a corporation of which as
a result of such exchange said person, alone or together with
others, not exceeding four (4) persons, gains control of said
corporation.

CONTROL MEANS ownership of stocks in a corporation

possessing at least 51% of the total voting power of all classes
of stock.
RR 5-2021 (CREATE LAW)
GAIN RECOGNIZED, LOSS NOT RECOGNIZED RULE

1. Transactions not solely in kind

2. Illegal Transactions
3. Transactions between related taxpayers
4. Wash Sale Transaction
GAIN RECOGNIZED, LOSS NOT RECOGNIZED RULE

RELATED TAXPAYERS

1. Members of a family
2. Corporation and individual
3. Two Corporations
4. Parties to a trust – trustor, trustee, beneficiary and
fiduciary
BAR 2019

B Transferred his ownership over a 1,000 square meter commercial

land and three door apartment to ABC Corp, a family corporation of
which B is a stockholder. The transfer was in exchange of 10,000
shares of stock of ABC. As a result, B acquired 51% ownership of ABC
Corp with all the shares having the right to vote. B paid no tax on the
exchange, maintaining that it is a tax avoidance scheme allowed by
law. The BIR on the other hand insisted that B’s alleged scheme
amounted to tax evasion.

Should B pay taxes on the exchange?

ESTATE PLANNING

An estate planning (conveyance of property to a family corporation for shares)

within the means sanctioned by Section 35, (now Section 40) of the Tax Code has
been held to be one of tax avoidance.

(Delphir Trades Corporation vs IAC, 157 SCRA 349)

CIR vs Filinvest Development Corp, GR No. 163653, July 19, 2011)

In the tax free exchange of property for shares of stock, the

law would apply even when the exchanger has already
control of the corporation. The mere increase or appreciation
in the value of said shares cannot be considered income for
taxation purposes. It can be treated as an increase in capital.
GAIN RECOGNIZED, LOSS NOT RECOGNIZED RULE

WASH SALE TRANSACTION (61 day sale)

1. Purchase of substantially identical stock or securities

beginning 30 days before the date of sale or
ending 30 days thereafter
2. Seller must not be a dealer in securities
3. It covers acquisition through a taxable exchange
and the making of an option contract