C6 Capital Gains Tax

15/10/2023
Chapter 6
CAPITAL GAINS TAXATION
CLASSIFICATION OF TAXPAYER'S PROPERTIES

1) ORDINARY ASSETS – used in business
a. Held for sale – inventory
b. Held for use – supplies and property, plant and equipment.
2) CAPITAL ASSETS – any asset other than ordinary asset

a. Personal assets (non-business assets)
b. Business assets which are :
Financial assets – cash, receivables, prepaid expenses and investments.
Intangible assets – patent, copyrights, leasehold rights and franchise rights.
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CLASSIFICATION OF TAXPAYER'S PROPERTIES
ASSET CLASSIFICATION
- the classification of assets as ordinary asset or capital
asset depends upon the nature of the taxpayer's
business.
a. Domestic stock is an ordinary asset to a dealer in securities
but is a capital asset to a non-security dealer.
b. Vacant/unused lot is an ordinary asset to a taxpayer in a
real estate business and is a capital asset to those not
engaged in real estate business.
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Asset classification rules
a. Property purchased for future use in business is an ordinary
asset even the later purpose is beyond the taxpayer's control.
b. Discontinuance of the active use of the property does not
change its character as previously establish as business
property.
c. Real property used, being used or have been used previously
used in trade shall be considered ordinary assets.
d. Properties classified as ordinary asset for being used in
business by a taxpayer not engaged in real estate business
are automatically converted to capital assets upon showing
the proof that the same have not been used in business for
more than 2 years prior to the consummation of the taxable
transaction involving such property.
e. Depreciable asset is an ordinary asset even if it is not fully
depreciated or even if there is failure to take depreciation.
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f. Real properties used by an exempt corporation in its exempt
operations are capital assets.
g. Property transferred by sale, exchange, inheritance, donation or
declaration of property dividends shall depend on whether or
not use in business.
h. Real properties subject of involuntary transfer such as
expropriation and foreclosure sale, the involuntariness of such
sale shall have no effect on the classification of property.
i. Change of business from real estate to non-real estate
business shall not change the classification of the ordinary
asset previously held.
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DEALINGS IN PROPERTIES
Types of Gains
a. Ordinary gain - arises from sale, exchange and other disposition
of ordinary assets.
b. Capital gain - arises from sale, exchange and other disposition
of capital assets.
Taxation of Gains:
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Capital gains subject to CGT :
a. Sale of domestic stocks sold directly to buyer
b. Sale of real properties not used in business
Scope of CGT : (train law / create law)

OLD NIRC
5%-10% 2 tier
SALE OF DOMESTIC STOCKS

DIRECTLY TO BUYER
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SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

DOMESTIC STOCKS
- are evidenced by ownership or rights to ownership in a
domestic corporation regardless of its features, such as ;
1) Preferred stocks
2) Common stocks
3) Stock rights
4) Stock options
5) Share warrants
6) Unit of participation in any association, recreation or amusement club

DOMESTIC STOCKS (other dispositions)
- capital gains tax covers not only sales of domestic stocks for
cash but also exchange in kind and other dispositions.
1) Foreclosure of property in settlement of debt.
2) Pacto de retro sales - sale with buy back agreement.
3) Conditional sales - sales which will be perfected upon completion
of certain specified conditions.
4) Voluntary buy back of shares by the issuing corporation -
redemption of shares which may be re-issued and not for cancellation.
(Treasury Shares)
* Buying back shares (TS) – subject to CGT
* Re-issuance of TS, Share Premium-TS is additional capital (APIC) not income
therefore not subject to CGT. (looks like regular issuance)
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DOMESTIC STOCKS (dispositions other than cash)
Other disposition does not include :
1) Issuance of stocks by corporation - is a financing transaction rather
than a sale transaction. (TS are not subject to CGT)
2) Exchange of stocks for services - cannot be considered as exchange for
property, no gain/loss can be imputed as it involves payment in kind.
3) Redemption of shares in mutual fund - are exempted by NIRC from
income taxation.
4) Worthlessness of stocks - is considered as capital loss subject to regular
income tax.

DOMESTIC STOCKS (dispositions other than cash)
Other disposition does not include :
5) Redemption of stocks for cancellation by the issuing corporation
- gain/loss on redemption shall be subject to RIT under dealings with
properties. (Redeemable Preference Shares).
For cancellation – RIT  Redeemable PS
For reissuance - CGT  Voluntary Buy-Back of Shares (TS)
6) Gratuitous transfer of stocks (donation by inter-vivos (living donor)

or mortis causa (deceased donor)) - subject to transfer tax.
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MODES OF DISPOSING DOMESTIC STOCKS
- shares of stocks may be sold, exchanged or disposed ;
a. Through Philippine Stock Exchange (PSE)
b. Directly to buyer
OLD NIRC:
= 7,000 x 1% x 50%
= 35
TRAIN / CREATE:
= 7,000 x 1% x 60%
= 42
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Nature of CGT :
1) Universal Tax
- it applies to all taxpayers disposing stocks classified as capital assets
regardless of classification of the taxpayer.
- By situs, the gain on sale of domestic stocks is within, the tax applies
even if the sale is executed outside of the Philippines.
Nature of CGT :
2) Annual Tax
- it is imposed on the annual net gain on the sale of domestic
stocks directly to buyer.
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 is deducted if paid by the seller.
 Selling Price shall mean :

1) Cash sale - total consideration received per
deed of sale.
2) Partly money and partly property - sum of
money and fair value of property received.
3) Exchanges (solely property) - fair value of
property received.
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Tax Basis – basis of the stocks disposed shall mean :

1) If acquired by purchase - tax basis is the cost of the property determined
by the following methods (descending order of priority) ;
a) Specific Identification - if the shares can be specifically identified.
b) Moving Average Method - if books of accounts are maintained by the
seller where transaction of every particular stock is recorded.
c) First-in First-out Method - if stocks cannot be specifically identified.
Tax Basis shall mean :

2) If by devise (RP), bequest (PP) or inheritance - tax basis is the fair value
at the time of death of the decedent.
3) If acquired by gift - tax basis is the lower of fair value at the time of gift
and the basis in the hands of the donor or the last preceding owner by whom
it was not acquired by gift.
4) If acquired by inadequate consideration - tax basis is the actual amount

paid by the transferee of the property.
5) If acquired under tax-free exchanges - tax basis is the substituted basis of

the stocks.
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CAPITAL GAINS TAX RATE :

A taxpayer disposed his investments in domestic stocks costing P100,000 directly to a buyer
240,000. It paid on the sale P2,000 and P500, respectively, for broker’s commission and
documentary stamp tax expense. The stocks have fair value of P300,000 at the date of sale.
Under OLD NIRC :
Under TRAIN LAW / CREATE LAW
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TAX COMPLIANCE:
1) Transactional CGT – BIR 1707
2) Annual CGT – BIR 1707A

TRANSACTIONAL CGT :
- the capital gains or losses are required to be reported after each sale,
exchange, and other dispositions through the CGT return. (BIR 1707)
- Due date: 30 days after each sale transaction
ANNUAL CGT :
- the 15% CGT is an annual tax.
- the CGT is recomputed on the annual net gains and reported through a
final consolidated return. (BIR 1707A)
- Due date:
Individual taxpayers –April 15 of the preceding taxable year
Corporate taxpayer – 15th day of the fourth (4th) of the preceding taxable year
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No loss scenario
- due to the flat 15% tax, there will be no CGT payable in the final
consolidated return if all transactions during the year resulted to a gain.
- filing of the BIR 1707A may not be necessary.

No loss scenario
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With loss scenario
- if there is a losing scenario, it is best to offset losses first with subsequent
gains. Residual tax payable must be settled.
- No tax payment shall be made until the same turns into a net gain.
- This intra-period loss carry-over procedure is necessary to avoid
overpaying the government every time there is a gain.
- And, seeking refunds at the end of the year for loss incurred could cause
unnecessary workload for both the taxpayer and the BIR.

With loss scenario
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With loss scenario

With loss scenario
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INSTALLMENT PAYMENT OF CGT :
- when domestic stock is sold in installments, the CGT may also be paid in
installments if the ;
1) Selling price exceeds P1,000
2) Initial payment does not exceed 25% of the selling price

SPECIAL TAX RULES IN CAPITAL GAIN/LOSS MEASUREMENT
1) Wash sales of stocks
2) Tax-free exchanges
a) Exchange of stocks pursuant to a merger or consolidation
b) Transfer of stocks resulting in corporate control
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UNDERSTANDING WASH SALE & WASH SALES RULE
A wash sale is a transaction in which an investor seeks to maximize tax
benefits by selling a losing security at the end of a calendar year so they
can claim a capital loss on taxes that year.
To avoid the abuse of the incentive, wash sales rule is implemented.

WASH SALES RULE :
- wash sale of securities is deemed to occur when within 30 days before
and 30 days after the sale (also referred to as 61-day period), the taxpayer
acquired substantially identical securities.
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WASH SALES RULE :
- when there is a loss on the sale of securities, the loss is not deductible
against capital gains if the substantially identical replacement shares are
acquired within the 61-day period.
- the adjusted basis of replacement shares should be computed as
follows ;
(Replaced/Sold x Capital Loss)
- applicable to non-dealers in securities and not applicable to dealers in

securities.
WASH SALES RULE :

Illustration 1 : Acquisition before a losing sale
In 2020, Mr. Toledo had the following transactions in the shares of Talisay Inc, a
domestic corporation. Mr. Toledo uses the FIFO method.
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WASH SALES RULE :

Illustration 1 : Acquisition before a losing sale
WASH SALES RULE :

Illustration 2 : Acquisition after a losing sale
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WASH SALES RULE :

Illustration 2 : Acquisition after a losing sale
WASH SALES RULE :

Illustration 3 : Acquisition before and after a losing sale.
domestic corporation.
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TAX-FREE EXCHANGES
Merger
A B A/B
Consolidation
A B C

TAX-FREE EXCHANGES
1) Merger or Consolidation  (gain/loss is not recognized)
- gains or losses on share-for-share swaps pursuant to a plan of merger or

consolidation will not be recognized for taxation purposes.
- In effect, the transaction is merely involves a replacement of shares of
stocks of the shareholders of the absorbed (acquired) corporation with
them being simply integrated as shareholders of the acquiring corporation.
- Substituted basis is the value of the previously held shares.
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TAX-FREE EXCHANGES
1) Merger or Consolidation  (gain/loss is not recognized)
Mr. Santiago is required to surrender his Carranglan Inc. shares in exchange for Baler
shares with total fair value of 1,200,000 pursuant to the merger.
The Carranglan shares were previously purchased by Mr. Santiago for 1,000,000.
* 200,000 indicated gain is not taxable as it involves stocks for stocks exchange
* 1,000,000 tax basis shall be carried over as substituted basis.

TAX-FREE EXCHANGES
2) Initial Acquisition of Control (gain/loss is not recognized)
- no gain or loss should be recognized if property is transferred by a person in
exchange for the stocks or units of participation in such corporation of which
as a result of such exchange, said person, alone or together with others not
exceeding 4, gains control of the said corporation.
- Control - ownership of stocks in a corporation possessing at least 51% of the
total voting power.
- this rule is relevant only to CGT or recognition of capital gains when stocks are
exchanged in the acquisition of corporate control.
- Substituted basis is the value of the previously held shares.
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TAX-FREE EXCHANGES
2) Initial Acquisition of Control (gain/loss is not recognized)
Mr. Gapan exchanged his shares in Cabanatuan Corp. costing 2,000,000 in exchange for
the shares of Dingalan Corp. with a fair value of 1,800,000.
The transfer resulted in Mr. Gapan acquiring 51% ownership of Dingalan Corp.
* 200,000 indicated loss shall not be recognized. (even if indicated gain – not recognized)
* 2,000,000 tax basis is the same as tax basis of Gapan shares exchanged.
* initial acquisition of corporate control < 5 persons is viewed as investing transaction rather
than income generating transaction.

TAX-FREE EXCHANGES
Exchanges not solely for stocks  (gain only is recognized)
- exchanged not solely for stock but with other consideration such as cash or
properties.
- the gains but not losses are recognized up to extent of cash and other properties
received if the stocks are exchanged not solely for stocks but with other
consideration such as cash and other properties.
Lower of:
Cash & Property Received
vs
Indicated Gain
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Lower of:
Cash & Property Received
vs
Exchanges not solely for stocks  (gain only is recognized) Indicated Gain

Minimum public float requirement by Publicly Listed Corporations
- listed corporations are mandatory required to maintain a minimum public
ownership under PSE regulations which is the higher of ;
a) 10% of issued and outstanding shares
b) 20% minimum public ownership required by SEC and PSE.
- noncompliance to the minimum public ownership shall result in the delisting of

stocks in the PSE.
- the sale of listed stocks which flow below their minimum public ownership (delisted
stocks) is subject to 15% CGT and not to the 6/10 of 1% stock transaction tax.
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SALE OF STOCKS WITH DIVIDENDS (ON/EX)
Dividend-on
- the dividends belongs to the buyer, thus, selling price includes price of stocks and dividends.
- hence, you need to deduct the dividends to the selling price.
Ex-dividend
- the dividends belongs to the seller, thus, selling price includes price of stocks only.
- hence, no need to deduct the dividends to the selling price.
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Persons not liable to 15% CGT
1) Dealers in securities (RIT)

2) Inventors in shares of stocks in a mutual fund company in connection with gains
realized upon redemption of stocks.
3) All other persons, whether natural or juridical, who are specifically exempt from
the national revenue taxes under existing investment incentives and other
special laws.
a. Foreign government and foreign GOCC.
b. Qualified employee trust funds
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SALE OF REAL PROPERTIES

NOT USED IN BUSINESS
SALE OF REAL PROPERTIES NOT USED IN BUSINESS

Sale, exchange and other disposition of REAL PROPERTY
CLASSIFIED AS CAPITAL ASSET located in the Philippines
- is subject to a tax of 6% of the selling price or fair value, whichever is higher.
- fair value – is whichever is higher between ;
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Sale, exchange and other disposition of REAL PROPERTY CLASSIFIED
AS CAPITAL ASSET located in the Philippines

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NATURE OF THE 6% CGT
a) Presumption of Capital Gains
- the 6% CGT applies even if the sale transaction resulted to a loss.
- the basis of taxation is the selling price or fair value (whichever is
higher) not the actual gain.
b) Non-consideration of the involuntariness of the sale

- the CGT applies even if the sale is involuntary or is forced by
circumstances such as in the case of expropriation sale, foreclosure
sale, dispositions by judicial order, and other forms of forced
disposition.
- it also applies to conditional sales and pacto de retro sales.
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NATURE OF THE 6% CGT
c) Final Tax
- the CGT shall be withheld by the buyer against the selling price of
the seller and remit the same to the government.

SCOPE AND APPLICABILITY OF 6% CGT
RFC & NRFC  RIT
Under NIRC ;
- Resident citizens and domestic corporations (global income) are subject to RIT on
the actual gains on sale, exchange and other dispositions abroad.
- if the foreign corporations (RFC and NRFC) realize gains from the sale of real
property classified as capital assets -- (capital gain - RIT)
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EXCEPTIONS TO THE 6% CGT
1. Alternative Taxation Rule
2. Exemption Rules
a. Exemption under NIRC
b. Exemption under Special Laws

ALTERNATIVE TAXATION RULE
- an individual seller of real property capital assets has the option to be
taxed at either ;
a. 6% Capital gains tax (CGT)
b. Regular income tax (RIT)
- it should be noted that this is permissible only when ;

a. the seller is an individual taxpayer
b. the buyer is the government, its instrumentalities or agencies
including GOCCs.
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BASIS OF ALTERNATIVE TAXATION
- the alternative taxation is intended to ease the burden of government
expropriation where taxpayers may incur losses on the forced
expropriation sale and are still required to pay tax.
- When the government imposed the power of eminent domain, the

taxpayer maybe forced to suffer a loss and required to pay 6% CGT
because of the sale, which would be too oppressive to the taxpayer,
hence, with the regular income tax option, the taxpayer may be given
the benefit of deduction of the capital loss without paying the 6% CGT.

EXEMPTION TO THE 6% CGT UNDER THE NIRC
- the sale, exchange and other disposition of a principal residence for
the acquisition of a new principal residence by individual taxpayers is
exempt from 6% CGT.
- Principal Residence - means house and lot which is the primary

domicile of the taxpayer. (if multiple residence - the one shown in
latest tax declaration)
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EXEMPTION TO THE 6% CGT UNDER THE NIRC
Requisites for Exemption :
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CGT EXEMPTION UNDER SPECIAL LAWS
a) Sale of land pursuant to the Comprehensive Agrarian Reform
Program (CARP).
- the sale of agricultural lands by landowners pursuant to the CARP of the
government shall be exempt from CGT.
- the interest income on the selling price agreed upon by the landowner and
tenant-buyer shall be exempt from income tax.

CGT EXEMPTION UNDER SPECIAL LAWS
b) Sale of socialized housing units by the National Housing Authority (NHA)
- the sale of social housing units for the underprivileged and homeless citizens
by the NHA pursuant to the Urban Development Housing Act of 1992 is exempt
from CGT.
- this rule is limited only to socialized housing units not to NHA commercial lots
which is subject to CGT or RIT and documentary stamp tax.
- to qualify for the exemption, socialized housing units of the NHA must comply
with price ceilings set by the NIRC and other special laws.
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INSTALLMENT PAYMENT OF CGT :
- when real property capital asset is sold in installments, the CGT may also
be paid in installments if the ;
1) Selling price exceeds P1,000
2) Initial payment does not exceed 25% of the selling price
DOCUMENTARY STAMP TAX
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a. Documentary stamp tax on the sale, exchange and other
dispositions of DOMESTIC STOCKS DIRECTLY TO BUYER
- the sale of stocks is subject to a documentary stamp tax of P 1.50 for every 200
of the par value of the stocks sold.
train law – 1.5/200
old law – .75/200
b. Documentary stamp tax on the sale of REAL PROPERTIES

- the sale of real property capital assets is subject to documentary stamp tax of
P15 for every 1,000 and fractional parts of the basis thereof.
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BIR TAX RETURNS:
CAPITAL GAINS TAX

BIR 1707 – DOMESTIC STOCKS DIRECTLY TO BUYER
BIR 1706 – REAL PROPERTY
Deadline: 30 days after transaction

BIR 2000
Deadline: 5 days after end of the month of the transaction
END OF PRESENTATION
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C6 Capital Gains Tax

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C6 Capital Gains Tax

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15/10/2023

CAPITAL GAINS TAXATION

CLASSIFICATION OF TAXPAYER'S PROPERTIES

2) CAPITAL ASSETS – any asset other than ordinary asset

CLASSIFICATION OF TAXPAYER'S PROPERTIES

Scope of CGT : (train law / create law)

SALE OF DOMESTIC STOCKS

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

6) Gratuitous transfer of stocks (donation by inter-vivos (living donor)

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

MODES OF DISPOSING DOMESTIC STOCKS

MODES OF DISPOSING DOMESTIC STOCKS

MODES OF DISPOSING DOMESTIC STOCKS

MODES OF DISPOSING DOMESTIC STOCKS

 is deducted if paid by the seller.

MODES OF DISPOSING DOMESTIC STOCKS

 Selling Price shall mean :

MODES OF DISPOSING DOMESTIC STOCKS

Tax Basis – basis of the stocks disposed shall mean :

MODES OF DISPOSING DOMESTIC STOCKS

Tax Basis shall mean :

4) If acquired by inadequate consideration - tax basis is the actual amount

5) If acquired under tax-free exchanges - tax basis is the substituted basis of

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

Under OLD NIRC :

Under TRAIN LAW / CREATE LAW

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

To avoid the abuse of the incentive, wash sales rule is implemented.

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

- applicable to non-dealers in securities and not applicable to dealers in

WASH SALES RULE :

WASH SALES RULE :

WASH SALES RULE :

WASH SALES RULE :

WASH SALES RULE :

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

- gains or losses on share-for-share swaps pursuant to a plan of merger or

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

- noncompliance to the minimum public ownership shall result in the delisting of

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS SOLD DIRECTLY TO BUYER

1) Dealers in securities (RIT)

SALE OF REAL PROPERTIES

SALE OF REAL PROPERTIES NOT USED IN BUSINESS

SALE OF REAL PROPERTIES NOT USED IN BUSINESS