CAPITAL ASSETS, CAPITAL GAINS & LOSSES

1. Capital Assets
a. Capital assets defined
The term "capital assets" means property held by the taxpayer (whether or not
connected with his trade or business), but does not include:
1) stock in trade of the taxpayer or
2) 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, or
3) property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or
4) property used in the trade or business, of a character which is subject
to the allowance for depreciation; or
5) real property used in trade or business of the taxpayer.

c. Exercise: Classify the following into capital asset or ordinary asset

Classification Number
1. Accounts receivable
2. Securities held as investment
3. Interest of a partner in a partnership
4. Apartment house
5. Inventories of raw materials, work in process and finished goods
6. Office equipment
7. Land used in business
8. Land for sale by a real estate dealer
9. Residential house and lot
10. Car for personal use
*

2. Terms Associated with Capital Assets

a. Net capital gain
b. Net capital loss
c. Holding period
The term "net capital gain" means the excess of the gains from sales or
exchanges of capital assets over the losses from such sales or exchanges.
The term "net capital loss" means the excess of the losses from sales or
exchanges of capital assets over the gains from such sales or exchanges.
The length of time the asset was held by the taxpayer. It covers the period
from the date of acquisition to the date of sale.

3. Percentage Taken Into Account

In case of taxpayer, other In the case of a taxpayer, other than a corporation, only the following
than a corporation percentages of the gain or loss recognized upon the sale or exchange of a capital
asset shall be taken into account in computing net capital gain, net capital loss,
and net income:
(1) One hundred percent (100%) if the capital asset has been held for not
more than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve
(12) months

4. Limitation of Capital Loss

Limitation on capital loss Losses from sales or exchanges of capital assets shall be allowed only to the
extent of the gains from such sales or exchanges.

If a bank or trust company incorporated under the laws of the Philippines, a

substantial part of whose business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or political subdivision
thereof), with interest coupons or in registered form, any loss resulting from such
sale shall not be subject to the foregoing limitation and shall not be included in
determining the applicability of such limitation to other losses.

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5. Net Capital Loss Carry-Over
Net capital loss carry-over If any taxpayer, other than a corporation, sustains in any taxable year a net capital
of taxpayer other than a loss, such loss (in an amount not in excess of the net income for such year) shall
corporation be treated in the succeeding taxable year as a loss from the sale or exchange of a
capital asset held for not more than twelve (12) months.

6. Retirement of Bonds, Etc.

Amount received upon the Amounts received by the holder upon the retirement of bonds, debentures, notes
retirement of bonds or certificates or other evidences of indebtedness issued by any corporation
(including those issued by a government or political subdivision thereof) with
interest coupons or in registered form, shall be considered as amounts received in
exchange therefor.

7. Gains and Losses from Short Sales, Etc.

Gains and losses from For purposes of this capital gains and losses:
short sales and options (1) Gains or losses from short sales of property shall be considered as gains or
losses from sales or exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or options to
buy or sell property shall be considered as capital gains or losses

8. General professional partnership

Accounting for capital Capital gains or losses of the general professional partnership will be accounted
gains or losses of general for by the partners in proportion to their interest in the partnership.
professional partnership
9. Sales of Capital Assets Which Are Subject to Capital Gains Tax (Final Tax)
a. Sale of shares of stock not traded in the local stock exchange (15% based on net capital gains)
b. Sale of real property classified as capital asset (6% based on selling price or FMV whichever is higher)

10. Transactions Resulting in Capital Gains or Losses (No Sale or Exchange)

a. Worthless shares of stock
b. Worthless bonds
c. Retirement of bonds
d. Short sales of property
e. Option gains or losses
If shares of stock become worthless during the taxable year and are capital
assets, the loss shall be considered as a loss from the sale or exchange of
capital assets on the last day of such taxable year.
If bonds, debentures, or other evidence of indebtedness of any corporation
(including those issued by the Government) are ascertained to be worthless
and charged off within the taxable year and are capital assets, the loss shall
be considered as a loss from the sale or exchange of capital assets on the
last day of such taxable year.
Amounts received by the holder upon the retirement of bonds, debentures or
other evidence of indebtedness issued by any corporation (including those
issued by the government) with interest coupon or in registered form, shall
be considered as amounts in exchange thereof.
Gains or losses from short sales of property shall be considered as gains or
losses from sales or exchanges of capital assets.
Gains or losses on account of failure to exercise a privilege or options to buy
or sell property are considered as capital gains or losses as the case may be.
f. Liquidating dividends
g. Liquidation of partnership
When a corporation distributes all of its assets in complete liquidation, the
gain or loss sustained by the stockholder, whether individual or corporate, is
capital gain or losses as the case may be.
When a partner retires or the partnership is dissolved, he realizes gain or
loss as follows:
Amount received for his interest xxx
Less: Investment xxx
Share in the undistributed partnership income
which has been reported as income xxx xxx
Gain (loss) xxx