el | chapter 6 - Capital Gains Taxation CHAPTER 6 CAPITAL GAINS TAXATION chapter Overview and Objectives : This chapter discusses the items of gross income subject to the capital gains tax and the tax rules of the two types of capital tax under the NIRC. sr this chapter, readers are expected to be able to: 4, Identify and distinguish ordinary assets and capital assets 2. Recite the asset classification rules ri 3, Memorize the two types of capital gains subject to capital gains tax and their corrésponding tax rates and tax bases. )e 4, Master the procedural computations of the 15%capital gains tax,and the 6% capital gains tax 4 5. Master the rules on wash sales and tax-free exchanges 6. Master the exceptions to the 6% capital gains tax 7, Memorize the documentary stamp tax imposed on the sale of stocks and real properties 4 CLASSIFICATION OF TAXPAYER'S PROPERTIES 1. Ordinary assets - assets used in business, such as: i a. Stock in trade of a taxpayer or other real 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. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade.or business c. Real 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 inven bog PPE ld Business is habitual engagement in a comimercial activity involving the regular sale of goods or services fora profit. Non-profit entities are not businesses. Basically, ordinary assets are: a. Assets held for sale - such as inventory b. Assets held for use - such as supplies and items of property plant and equipment like buildings, property improvements, and equipment 2. Capital assets - any asset other than ordinary assets shares a byer % ca im nr % st, 2, PMv‘Chapter 6 - Capital Gains Taxation Basically, capital assets are: 1. Personal (non-business) assets of individual taxpayers 2) Business assets of any taxpayers which are: i a. Financial assets ~ such as cash, receivables, prepaid expenses ang investments am r b, Intangible assets - such as. patent, copyrights, leaseh franchise rights ao ANALYSIS OF PROPERTIES HELD BY TAXPAYERS: 2 INDIVIDUAL TAXPAYERS Personal asset Business asset (Allare capital assets) T £ 7 Ordinary assets Capital assets ‘CORPORATE TAXPAYERS por [ovainary assets] [/_Capitalassets Asset classification is relative ‘The classification of assets or properties as ordinary asset or capital asset does not depend upon the nature of the property but upon the nature of the taxpayers business and its usage by the business. Example: |. Adomestic stock is an ordinary asset to a dealer in securities but is a capital asset to anon-security dealer. ‘A “dealer in securities” is a merchant of stocks or securities with a registered place of business, regularly engaged in the purchase of securities and thelr re-sale to customers. 2. Avvacant and unused lot is an ordinary asset to a taxpayer engaged in the re ‘estate business such as realty dealer, realty developer, or lessor but is a capil asset to those not engaged in the real estate business. 172 IRB or HUDCC as dealer or developer or those with at least.6 taxable real estate 3s transactions in the preceding year. y banks are capital assets. Under RR6-2008, means all stocks and securities held by ies. ‘A property purchased for future use in’ bu: eae ‘ siness is’an ordinary asset even eae Purpose is later thwarted by circumstances beyond the taxpayer's ntinuance of the active use of the prope: viously established asa business freee a esate al properties used, being used, or have been previous! ofthe taxpayer shal be considered ordinary asete ny eum ade Properties classified as ordinary assets for being used in business by a taxpayer not engaged in the real estate business are automatically converted to capital assets upon showing of proof that the same have not been used in business for more than 2 years prior to the consummation of the taxable involving such property: assets an ordinary asset ever fully depreciated, or there isa failure to take depreciation during the period of ownership. Real properties used by an exempt corporation in its exempt operations are considered capital assets. Exempt corporations are not business. i; ‘The classification of property transferred by sale, barter or exchange, inheritance, donation, or declaration of property dividends shall depend on whether or not the acquirer us business. For real properties sul involuntary transfer such as expropriation and foreclosure sale, the involuntariness of such sale shall have no effect on the property. Change in business from real estate to non-real estate business shall not change the classification of ordinary assets previously held. ayers engaged in real estate business includes real estate dealer, real estate loper, real estate lessor and taxpayers habitually engaged in real estate business. iyers habitually engaged in real estate business include those registered with the 173Ch 'apter 6 - Capital Gains Taxation 6 - Capital Geins Taxation Mlustration 1 - Property : previously used in business has a building whic ing which was previous! the r ously used as an office and Is sub Periodic allowance for depreciation In July 4, 202%, Mr Alfonse implementes? Seareee shit ins business operations resulting tothe relocation of ig office In another ety and he resultant abandonment oFhisoffce, -rypts OF GAINS ON DEALING rr. Al 3S IN PRO} eee eats 1s'a not engaged in real estate business M orainary gain - arises from the Aenea 5 Buia nen 2023 (ie. more than two years from discontinuance of use), the old offic pacto de retro sales and other conditi cchange and other disposition including ng shel be reclosed es eaptal sect upon showing of roof thatthe Same hy . Capieal gain - arises from itdonal suis of erly ose not beer as 2. the sal 7 use for more than two years. cape de retro salesand other sale exchange, and other dloposition in ding , melo jonal sales of capital assets ase 2: Mr. Afonso is engaged in realestate busier, 1e old office shall continue to be an ordinary asset despite ‘the abandonment or idling oy the property from active use. Mlustration 2 - Property acquired to be used in business In June 1 7021, Mr. Alfonso purchased a building to be used a5 a brant tes off ‘The building remained idle as of December 31,2024 due to an ongoing civil war, real estate business A-1 is @ capal as Fey caren ter ved i ro-cmle etec putting A- Fc pe a ae a ‘Non-profit entities are they engage ina profit-oriented or commercial activity. ‘taxation of Gains on Dealings in Properties Applicable taxation scheme Regular income tax | General Rule_: Regular income tax_| Exception rule: Capital gains tax CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX: ‘There are only two types of capital gains subject to capital gains tax: ins on the sale of domestic stocks sold directly to buyer Case 1: Mr. Alfonso is a not engaged in ‘The property shallremain to be an ordinary asset. The worn rule applies only ty cas ordinary asset for being used tn usinss 4 ee BO ae 2. Capital gains on the sale of real properties not used in business properties which are classified property purchased for fucure.use in business, cv" thot i antrol does not lose its character as an ordinary Circumstances beyond the taxpaye ‘SCOPE OF CAPITAL GAINS TAXATION SCOP EE] ins on dealings in capital assets "Tax Rates Gai 7 Gain on the sale, exchange, and other disposition. asset case 2: Mr. Alfonso is engaged in real estate business The property shall remain to be considered a5 ordinary asset Properties acuity taxpayers engaged in real estate business ‘shall remain to be ordinary asset even j ae amet is lve “a aven if they change che nacure of their real estate mmestic st lirectly to buyer discontinued from active use and eve! if they 7~Sale, exchange, and other disposition of real | 6% capital gains property in the Philippines tax 7 _Gains from other capital assets Regular incom tax properties other than those subject business. Illustration 3 - Disposal of property his house and lot inventory to his son as dowy imily residence. He ln ‘The tax treatment of gains on dealings in other: to capital gains tax will be discussed in detail n Chapter 12. Juan, a realty dealer, donated one o Il use the same as his fa tughter who will commences CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER. DISPOSITION OF for his upcoming marriage. His so donated another house and lot as tial capital of his dat itt notuseiti | DoMESTIC STOCKS DIRECTLY TO BUYER realty leasing business. ve house cin lot sib considered capital asset the 97 Doce he will Poe ee house and ot donated to the daughter shall be ‘considered ordinary asset aa taugher because she will use It In business. Distaticsincks lon 4 Exemptnon-business operation aonneeie stocks are evidence of owneyship.or tights to ownership:in a domestic Mlustration 4 Exe . corporation regardless of ts features, such as: ilding A~ for its non-prt ga Qontay Tanda Foundation owns Building which it uses nina mer te tare cma 3h her building, Building A-2, which it leased out fo ema 3. Stock rights 975 Iso owns anot commercial lessees.jpter 6 - Capital Gains Taxation - Stock options 6 ume narants meso stocks 5 : of . walue of stocks becoming worthless is a Participati : income tax This wil be decaaga Polo or similar clubs) ‘The capital gains tax exchange of ae COVES nt only sls of dome ‘ks in kind and other dispost 1. Foreclosure of pro that this does not include the voluntary buy-back of s by the 4. Voluntary buy back of shares by the issuing corporation, pepe es erway arnt Te sl ancellation d investor on bake tes which may be re-issued and rot ineended for c . oh bapack of share By 2. Exchange of stocks for services res ina mutual fund sof by the issuing corporation are transferred for insufficient a to ics for cancellation by the issuin consideration or at significant discount transfer oF tacks ‘vale the diference between fa vlue and sling pie 1s + donation o donor's Issue of stocks including treasury stocks ‘The issue of stocks to stockholders by ‘subject to transfer tax, not to income tax. ‘TAX ON SALE OF DOMESTIC STOCKS THROUGH THE PSE he sale of domestic stocks classified as capital assets’ through the PSE is not ‘subject to capital gains tax. It is subject to a stock transaction tax of 60% of 1% of such, the treasury. Under the NIRC and RR6-2008, however no express P not a dealer in stocks, sold the following stock investments through the share premtum. Hence treasury share premium should not Stik Etchange: gains Sie ee a Exchange of stocks for services AC P 4,000,000 P 3,700,000 P 300,000 The exchange or Issue of stocks for services cannot be x ‘SMB 3.900.000 _ 3.200.000 (__ 200,000) property, No gain or loss can be imputed as itinvolves payment of expense : Ezooo900 Fss00000 2B 100000 ‘Redemption of shares in a mutual fund Gains from redemption of shares in a mutué income taxation. ial fund are exempted by the NIRC from 176the sum of Prices of stocks through the PSE P. ‘Transaction tax rate ood his stocks receiving in exchange a building wth a tax basis of P2,000,000 @ fair value of P2,500,000, goods worth P100,000, and P400,000 cash. Mlustration 2: Dealer in stocks Mr. San Juan is a de ‘Assume the same data in the previous illustration except that Mr. San cole sce stocks are ordinary fect tothe stack transactio ‘The P300,000 ordinary gain a {000 ordinary omy Pe oe lar income tax. “ ay ‘acquired by purchase, tax basis is the cost of the property which will be CAPITAL GAINS TAX ON SALE, EXCHANGE, AND OTHER DISPOSITIONS Or Sine th oo he ney wh DOMESTIC STOCK DIRECTLY TO BUYER Pp aearninedlnthe lowing eros n denen 4 “Moving average method, if books of accounts are maintained by the seller ‘where transaction of every part ckis recorded. ¥ First-n, first-out method, ifthe stocks cannot be specifically identified. ‘I-acquired by devise, bequest, or inheritance, the tax basis Is the fair value at the time of death of the decedent. If acquired by gift ~ the tax basi lower of the fair market value at time of gift and the basis in the e donor or the last preceding owt by whom it was not acquired by gift. If acquired for inadequate consideration, the tax basis is the amount paid by 2, Annual tax 4 sai maposed on the annual net gain on the sale of domestic stocks rectly to i ccmarencn, buyer. ‘I acquired under tax-free exchanges, the tax basis is the substituted basis of the stocks. is determined as follows: Dee Prom Mlustration 1: Cost of acquisition Selling price ‘Mrs, Excellence purchased 1,000 shares of Bacolod Corporation for P100,000 and paii Less: the broker's commission of P1,000. The stocks were subject to a chattel mortgage o 10,000 which Mrs. Excellence assumed. ‘of the acquired Bacolod stocks shall be: r P- 100,000 fons assumed on the property purchased 10,000 ‘ costs - broker's commission 1.000 ax basis) 2111.000 ‘The documentary stamp tax is deducted if paid by the seller. L 178 2wares of the stocks of El Dotady -—Shares_. _Unitcost. Gast ~ 10000 P 10.00 P_ 100,000 from January 1 and March 1 respectively are deemed ares sold are deemed coming from the last purchase on shares inthe last purchase is computed as 10,000/20,000 x Under the moving average shares shall be computed a5 35, Less: Cast of shares sold 25.000 P 11.29 Quantity ‘ending shares 10.000 P_11.29 P2200 re inherited by Mrs. REO when Don Bosco died in March; es aes shares to Mrs. Lipa shall be P2,500,000, the fair value att 181Chay Pter 6 - Capital Gains Taxation shaper 6 - Cota sine Taxation stax shall be computed as follows: 3. Pw Fable inadequate consideration PL ZOO bo, ne haze Were bough by Mrs. REO from Dan Bosco for ony Oca rice paid for thers of the shares to Mrs, REO shall be P1,200,000, the actual aes nara ® 100,900 hake tee iputation of adjusted basis on tax-free exchanges will be discussed under an tons anges in this chapter. ; {oe 137,500 exch Garply by applicable rate: —— 1536 Ess Capital gains tax due Stocks sold for inadequate consideration the selling price is a gift subject to 0,000 difference of the P300,000 fair value and P 240,000 selling price is @ The excess of the fir value ofthe stocks over lonor’s tax if so intended by the séller as a donation. se 760.000 dieren se jon subject to donors tx. It must be noted thatthe bass of income tx i the ‘Mlustration realized gain. _ — ks directly to a friend for P500,000. The . the date ofsale. ‘pax compliance qreks are registrable securities which requires BIR tax clearance prior to their transfer of owners of tax returns is a pre-condition to tax ‘learance. The capital gains or losses are required to be reported after each Sale, exchange, and other dispositions through the capital gains tax return, BIR Form 1707. 2, Annual capital gains tax ‘The 15% capital gains tax is an annual tax. The CGT is recomputed on the ‘annual net gains and reported through a final consolidated return (BIR Form, 1707) on or before the 15th day of the fourth month following the close of the taxable year of the taxpayer. A seller sold his investment in domestic sto ‘shares have a tax basis of P300,000 excluding P10,000 expenses 00 rth many willing buyer at rres are readily marketable w! ot are ler opted to sell the same to his friend. Case 1: Assume that the shar {ts fair value of P650,000 but # ésoa00 )psnaoo gratuity subje Fair value cto transfer tax 500,000 }. paooano an subject capital gatas ax 300,000 Selling ree Less Costand expenses i ses of donor's tax will a on the derision of vale of socks 0° PUPOSS he reson ook, Bus ind Transfer Taxation, by the same author. be discussed in the book, Business a No loss scenario there will be no capital gains tax payable in the final the seller Se et Due to the flat 15% tax, during the year resulted to a gain Filing of case 2: Assume that the shares have a far vale Of Under immediate need of cash forcing hlm to sell ata big discount. Oe a aes 200,000 gain will still be subject to capital gains tax but the P150,000 BIR Form 1707A may not even be necessary. recount shall not be considered donation subject £2 “donor's tax since there is no SonSe ddonative intent n this case. “Assume the taxpayer had the following disposition of several equity securities directly ITAL GAINS TAX RATE toa buyer for the fiscal year ending June 30,2021: TeetRaIN law and CREATE law simplified the rate to 15% flat rate. Seling Cont Capt Date Equity Securities __Price expenses. —gainlloss)_ restration mcm ps2 Prtered stock? 200,000 P 100,000 P 100,000 snvestments in domestic stocks costing P100.0%0 Fe common stocks 100,000 90,000 10,000 ‘ 00 aie on the ‘sale P2,000 and P500, respectively for ae 5/14 Stock rights 160,000 70,000 ___90,000 boars fojon and docisnentary stamp OO SHPSPE ‘The stocks have 2 fait f 300,000 at the date of sale. ‘The following CGT shall be paid within 30 days ofeach sales transaction: 183 182Eee ee ere ee eee a ee eee ere Chapter 6 - Capital Gains Taxation Date __ Equity Securities ‘gainfloss). coTrate. CGT 1/12 Preferred stock P 100,000 x15% P 15000 3/18 Commonstocks 10,000 x 15% 1,500 5/14 Stock rights S000) xis% 13.800 ‘Total p20 000. ‘Annual compliance: Annual net gain P 200,000 nual capital gains tax due y Less: Transactional capital gains tax paid = Capital gains tax payable ‘With loss scenario i i 1 to offset losses first with subsequent Tr there are losing transactions, 1 Is best to Ot ee a be made unt a iss carry-over procedure is into a net tra-period lo: ime there is a gain and wid overpaying the government every seeking Yofinds at cee ng the year for losses incurred which could cause see ig ‘ary workload for both the taxpayer and the BIR, justration 1 ‘Mlustravi individual taxpayer had the following transactions during the year: Capital selling Cost & ‘Date BquitySecurties Price expenses —éaintloss)— 1/12 Preferred stock? 210,000 P 100,000 P 110,000 3/18 Commonstocks 80,000 90,000 ( 30,000) 8/14 Stock rights 160,000 70,000 TU/17 Stock options 80,000 100,000 (__20.000) Total Paz0.000 ‘Transactional compliance: For every sales transaction, the taxpayer shall file BIR Form 1707: _ Capital gains tax The capital gains tax would simply be P110,000 x 15% = 16,500. “There would be no capital gains tax payable. The taxpayer will simply file BIR Form 1707 indicating therein the P10,000 loss. Interim refund could not be 3d since the 15% CGT is an annual tax. The net gain/loss is inconclusive until year-end: The P10,000 loss should be carried over in the nett transaction. 184 ————— chapter 6 - Capital Gains Taxation 9/13 | The taxable Sapital gains ax hal be (P90,000 ~ taxpayers 000 ~ P10,000) ar PBO,000. The TEAAT Then ata Ray P80, 000 1595 = P12, a0. "no capital gain tax payable. The taxpayer Wil simply fle BIR Form 1707 ‘The taxpayer shall file BIR Form 1707A to claim refund for the tax overpayment: nd forthe tax overpay P 170000 gains taxdue P2550 Less: isactional CGT paid (P16.5K +. 75500 0 eal galas tx payable (overpay @—an00) ‘the tax code does not allow inter-period hn a er pd ye ape iustration 2 Ao ay et me sn ‘Transaction 1 aun Lass) 200,000 ‘Transaction 2 ( 240,000) ‘Transaction 3 "60,000, Yearly total 220000 ‘Tfansactionalenmplan CC ‘Transaction 1 | The taxpayer shall fle Form 1707 | 7 and % 15% oF Te nee ay P 200,000 x 15% or P30,000 “Transaction « | The tay “Transaction 3 The ta ay ero pay zero tax since P60,000 ~ P240,000 le stills Ret loss. ‘Annual compliance: ‘he taxpayer shal fle BIR Form 1707A to claim refund forthe tak overpayment: ‘Annual net capital gain P 20,000 tax rate 15%, gains tax due P 3,000 insactional CGT paid — 30.000 ins tax payable (overpayment) 22000) Miustration 3 ‘Assume instead that the taxpayer had the following series of capital gains anc 1d Ie onsale of domestic stocks directiy to buyers during the year: mS | 1857 Ch @Pter 6 - Capital Gains Taxation ‘Transaction 1 Gains (Losses) ‘Transaction 2 ( 240,000) Yearly total 300.000 Transaction. - msaction 1 | The taxpayer hall pay zero an pata “Transaction 2 ‘Annual compliance: BIR Form 17074 ‘may no longer be needed in th ‘been paid for the year and there is no possible claim for refund. pay 60,000 x 1596 or POD all capital gains tax has INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX ‘en ‘When domestic stock is sod in installments, the capital gains tax may also be paid rice exceeds P1,000; and tial payment does not exceed 25% of the selling price. on Case: Basle patanes made a sale of domestic stocks costing P700,000 3000. ‘The buyer agreed to pay in P100,000 monthly directly to a buyer for PL installments starting November 30. ‘The capital gains tax shall be: Selling price » 1000000 TeeEotofsharessold 700.000 Net capital gain P 300,000 attpy by. 158% zs5.000 ‘Net capital gains tax due Illustration 1: No mortgage on the shares sold Initial payment: First installment (November 30) P 100,000 Second installment (December 31) 100.000 ‘Total initial payment B-200.000 20% Ratio of initial payment (P200,000/P1,000,000) “The taxpayer is qualified to pay capital gains tax by installment. Under the installment method, the tax will be paid based on the pattern of collection of ice. The contract price is the total sum of money collectible from the normally the selling price in the absence of any indebtedness on the 186 pter 6 - Cay ins Taxation oe ng the capital gains tax payable every installment shall be todas: Collection / Contract pee rere ete ‘capital gains tax payable for cape osc or ery Ismet sal be P 4500 computed 8 that the selling price ts used to measure the inttal payment ratio, but the contract Fries used in determining the capital gains taxininstanene stration 2: With mortgage smustration ‘on stocks but not in excess of cost Asse 00000 beer al erteaged for P600,000 which the buyer ee oan Payable tn monthly installments of P100,000 ‘he gain and the capital gains tax shall be the same as P300,000 and P45,000 respectively. The contract price or total sum collectible on the sale shall be: seliing price Less: Mortgage assumed Contract price ‘The capital gains tax payable every installment shall be computed a! 100,000/P400,000xP45,000. ee at ee LE eee © ustration 3: With excess mortgage over cost ‘Assume instead that the stock was subject to P750\000 mortgage which the bt sumed. The P250,000 balance fs payable in monthly installments of 50,000 starting azsumed, The 72500 Payable in monthly installments of P50,000 starting, ‘The gain and the capital gains tax shall be the same as P3000 0 repose The exces of mortgage over the bas a the oct san inret Gow payment, a form of constructive receipt. sontract price shall be computed as follows: P 1,000,000 750,000 3 P 250,000 Constructive receipt (P750K mortjage- P700K basis) 50.000 Contract price 2_300,000 ‘The initial payment shall be computed as follows: P 50,000 50,000 ‘Total initial payment 2_150,000 187Chapter 6 - Capital Gains Taxation Ratio of intial payment (P150,000/P1,000,000) pies ‘The taxpayer Is qualified to pay capital gains tax in installments- ‘The capital gains tax shall be as follows: For the sale +P50,000/P300,000xP45,000 2_—=L.800 For every installment : P50,000/P300,000 x P45,000 ps0 SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS MEASUREMENT 1. Wash sales of stocks 2, Tax-free exchanges Pe ccew ee 30 days before and 30 d in a Wash sale of securities is deemed to ra ‘he St-dsy period), the nntract or option to acquire the same or Tosses on wash sales by non-dealers in gains because they are effectively of the shares. The immediate tical or a feigned loss. substantially identical securities. Cap! securities are not deductible against ‘unrealized, The taxpayer did totally let g0 reacquisition ‘of the shares makes the loss a theore' losing sale 30 days rule include stocks and bonds. The wash sales capital losses on domestic stocks purposes of the 61-day ificance on the recognition of reportable iy to buyer. For the purpose of this rule, substantially identical means that stocks or bonds ofthe same lass with ‘the same features. A common stock is not ‘substantially identical toa preferred stock. Participating and non-participating preferred stocks are not substantially identical. Ilustration 1: Acquisition of identical shares before a losing sale In 2023, Mr. Donald had the following transactions in the shares of Talisay, Inc, ¢ domestic corporation: Date Transaction. _Shares _ Price ___Cost __ JanuaryS Purchase 10,000 P 4.00 P 40,000 Marchi Purchase 10,000 4.10 41,000 March 18, Sale* 10,000 3.80 Mr. Donald uses the FIFO method in costing security transactions. 188 cchepter 6 - Capital Gains Taxation under the FIFO method, the 10,9 0,000 shares bought on januaryo ons Soputed as follows: S™SYS.The ares sold In March 18 came from the first ‘pital gain or oss on March 18, 2023 shall be selling price tess: Costof shares sold Grom Janua P 38,000 loss mucry purchase) _sa.000 ca 2200 pursuant to the wash sales rule, the deductible inthe computation ofthe ‘sold were fully replaced within the eidaypenetat ‘gains in 2023 since the shares nt oF fll co the 61-day period is at eat eaual othe quay ore rs cae seared in ed to the ax basso the rep we scepn a ae jon putting him in ‘The adjusted basis ofthe replacement shares, ‘acquired on March 1, 2023 shall be: Purchase price Add: Deferred loss on March 18 was! Basis of replacement shares. ee P 41,000 ——2000 ‘b43.000 What if the replacement shares are less than th fe shares. ‘Assume that the shares bought on March 1, 2023 were nly 8,000 shares for P32,800, Only the portion covered with replacement sh without replacement. ares shall be disallowed, The portion splitas follows: ‘cover is a deductible realized loss, Thus, the capital loss shall be Deferred loss (8,000 shares/10,000 shares xP2,000) P41, y 600 Deductible loss (2,000 shares/10,000 shares 372000) ——400 22.000 The adjusted basis of the replacement shares acquired on March 1, 2023 shall be: P 32,800 —100 P8440 Purchase price Add: Deferred loss on March 18 wash sales Basis of 8,000 replacement shares 1896 - Capital Gains Taxation Chapter 6 - Capital Gains Taxation \dentical shares before and after a losing sale What i by specie identfeation the 10,00 shares bought on March 1 2022 were oo ‘the same shares sold at a loss on March 18, 2023? Ee dire ore = herd ‘wash sales involve the sale of shares at 020, ba uiston Tn this ease, Porchee™ a naeg ‘Prce/share — value — effectivel 1c ar the sale by a covering 2601"! mot 00 P x ly re-acquired before or after the sale bY # OVS TT Te is no of Parease ae a 300.000 sales loss ated. Hence, the capital loss the P2,000 capital loss is not a wash replacement shares within the 61-day pei against capital gains. Mlustration 2: Acquisition of identical shares after losing se ss of Sta. Rita ng stocks 0 Im 2023, Mrs. Rachelle had the following ta! Sy nsactions i Corporation, a domestic corporation: Price, — S08 —Date__ Transaction. —$f%99— 72000 P2000 loss while there were a total of 8,000 replacement January4 Purchase pq 18.00 189 s in the 61-day period: 5,000 shares acquired on February 15 (Le, before the February 28 Sle ard ge 1600.; (7 29R000 3,000 shares acquired on March 4 (ie, after the sale = March4 Purchase follows: artil repla “Tih capa gaa cr capa inca bs ORDERS SST ug partial replacement, the capital loss shall be spi 7 Pepa 8,000 shares/12,000 sharesx P24K) P 16,000 Selling price i 4,000 shares/12,000 shares x P24K) 8.000 mains erectile ree ithin the 61-day peri ‘ Since there isa fll replacement cover (16. 12,000 star ocuded ‘as part of the cost ‘The adjusted basis of the replacement shares acquired on February 15, 2023 shall be: (he, March 4, 2023), the capital Joss shall be Purchase price P 105,000 of the replacement shares: : ‘Add: Deferred loss (5,000 shares/8,000 shares x P16K) 0,000 ass ofthe replacement shares purchased on March 4 shall be: Basis of the 5,000 replacement shares on February 15 2115.00 The basis of Purchase price Pe o00 “The adjusted basis of the replacement shares acquired on March 4, 2023 shall be: ‘Add: Deferred loss on wash sa'es B-ziz000 Purchase price P 48,000 Basis of 12,000 replacement shares Add: Deferred loss (3,000 shares/8,000 shares x P16K) 6,000 ‘than the shares sold? Basis of 3,000 replacement shares on March 4 P5400 whaeifreplacementsharesare [es than theshares SA 4 oo, 7130,000, In ‘Assume instead that only 7,000 shares were ‘ Mlustration 4: No replacement shares in the 61-day period ‘ase the capital loss shall be split as follows: On January 18, 2023, Mr. Real bought 10,000 shares of Gen, Luna Corporation for 000 Pp 14,000 100,000. On February 6, 2023, he sold the same shares for P95,000. On March 28, Deferred to og 000 Cael 6.000 2023, he bought 5,000 shares for P5S,000. 220.000 Note that the March 28 acquisition is beyond the 61-day period. Since there is no acquisition of replacement shares within the 61-day period, the P5,000 is not a wash sales loss but a deductible realized loss against capital gain from the sale of domestic stocks directly to a buyer. The basis of the shares bought on March 28, 2023 shall be 55,000. ‘The adjusted basis of the replacement shares acquired on March 4, 20231 P 110,000 Purchase price Add: Deferred loss on wash sales 14.000 P_124.000 Basis of 7,000 replacement shares 191 190nopter 6 ~ CePital Gains Taxation the element of permanence and not merely mom oer a far No. V-253, July 16,1957) not me jentary holding. (BIR exchange Is solely for stock, the assumption by the gotermining whether jing corporation of a liability of the others shall be disregarded. merger or consolidation yr occurs when one corporation acquires all or substantially all of the a merge’ properties of ote corporation. A consolidation occurs when two or more Frporations merged to form one corporation. The term “securities” includes wr debentures but does not include notes of whatever class or duration. eral Chapter 6 - Capital Gains Taxation Rationale ofthe wash sales rule e rev ash sales rule is Intended to prevent taxpayers from felgnte temporary vee ae could enable them to manipulate their reportable taxable net ea Brohbiion against the claim of wash sales is not an absolute rule 4.s2rm of deferral of loss intended to reflect the ‘economic SUDStANCe Of the xs in securities The wash sales rule is not applicable to dealer of business for them to buy and sell stocks and asa result realize gains or losses within short duration of time. ponds o ‘TAX FREE EXCHANGES ‘the gains or losses on share-for-share swaps pursuant to a plan of merger or AA. Corporate reorganization Jpnsotidation will not be recognized for taxation purposes. Pe a areswap B. I acquisition of control Gorsuant fo a plan of merger or consolidation, the shareholders of the acquired corporation will be integrated in the acquiring corporation. The shares of the acquired corporations will be called in for replacement with the shares of the sn or on ts stocks or securities, acquiring corporation. CORPORATE REORGANIZATION ized on a corporatior sect, the transaction merely involves a replacement of shares of stocks of the No gain or loss shall be recogni such corporation is a party to a reorganization and exchanges property in pursuance of a plan of reorganization solely for stocks or securities in another Ine corporation that isa party to the reorganization. tn oe ofthe absorbed corporation wth tem : ‘ shareholders of the acquiring corporation. jeing simply integrated as lustration Mr. Fernando was required to surrender his Zambales Inc. shares in exchange for with total fair value of P1,200,000 pursuant to the merger of Zambales shares inc. and Bataan Inc. The Zambales shares were previously purchased by Mr. Fernando for P1,000,000. Reorganization is defined as: ‘ fepantatin st ya ag orton ans rey trast stocks ina corporation, which sa party tothe morse’ ot consolidation; eroration in exchange solely forall or apart of Ws voting 2. The acquisition by one cor lely for all or part of the 1cks of another corporation if stocks, or in exchange sol c Shieh is in control ofthe acquiring corporation, of sto. tance puter the acquisition, the acquiring corporation hee ‘control of such ‘nee'Corporation whether or not such acquiring corporation hhad contre -ciFspign of fame aha rpatyp ling ack) lab, 1200000 Less: Cost of Zambales shares exchanged “900.000 Indicated gain E2000 immediately before the acquisition. : 43. The sequisition by one corporation, in exchange soley for ll of 2 Pa ofits voting Fen aeenchange solely forall or part of the voting stocks of Corporate dees Or estrol of the acquiring corporation, of substantially all of the properties of another corporation. 1a neiptcalization or an arrangement whereby the stocks and bonds of + corporation are readjusted as to amounts, income, or priority or #n ‘agreement of sot tholders and ereditors to change and increase or decrease the capitalization or debts of the corporation or both; or 5, A reincorporation or the formation of the same corporate business with the same asset or the same stockholders surviving under a new charter. other corporation” means the acquisition by ont ther corporation which ‘The P200,000 indicated gain is not taxable as the exchange involves stocks for stocks. imilarly, an indicated loss shall not likewise be recognized. The P1,000,000 tax basis of the Zambales shares given shall be carried over as the substituted basis of the Baler shares received. ‘Share swap resulting in a control ‘The acquisition of control in another corporation achieved by acquisition of majority ofits voting shares or by the acquisition of substantially all of its assets is tax free if the acquiring corporation exchanged therewith: a its own shares, or . shares ofits controlling parent corporation “Substantially al he properties of an 193 corporation of at least 80% of the assets, including cash, of anot 192Chay Pter 6 - Capital Gains Taxation Mustration ‘swap 16 Subsien 1 Share swap for control Invesco. Subs Ownership in Newsubsico, 60% owned by its parent company Parenco and 40% bY a” investor, Subsequent aie Bought and held as investment shares of } Subsico acquired 20% share ownership in Affico and 60% share Parenco and Invescg, Invesco Z Parenco Za Subsico +30% tax tretment ofthe foregoing share swaps on Subsico, ‘Assume that after the acquisition of initial 60% : made a second share swap for another 10% NewSubsico and 25% Affico. Subsico now have 70% controlling interest in Newsubsico and 55% controlling interest in Affico, - Capital Gains Taxation +——Sharesziveninexchange | Subsico own shares. Investment in Parenco shares jwSubsico ‘of corporate reorganization, all be recognized in step up acquisitions resulting in acquisition of corporate 3 - swap for assets stration 1, except that instead of ;subsico and the net assets ip, Subsico ac -s by exchanging shares: ‘by acquiring al its assets and assuming i The following illustrates the Investment acquisitions under the following scenario: i Sacer gaara ppechen gt Income tax status | aA aan va “Warehouse building oF Subsico own shares ry NewSubsico [Investment in Parenco shares. —[——Exempe Newsubsico Tavestment in Parenco shares Table see ee investment in Invesco shares ‘Exempt taaole ‘Subsico own shares Exempt Taxable shares of Affico Tavestment in Parenco shares Taxable Net assets of Affico Exe cola Investment in Invesco shares. Taxable? Exempt E ee nee as "Tn sition ate controls exempt. tay the acquisition of sul ibe werheati tr = exchange ofsbares resulting inthe acquisition of corporate contr! STE iy ent share or own shares are given in exchange. The mere acqul 2) Though apparenty silent inthe law, Subsieo's own shares issuance rather than a property disposition; hence, no tax purposes. 3. Since no corporate control was acqui Income tax (Le. capltal gains tax)- Mlustration 2 - share swap for control The following table illustrates the tax treatment of the foregoing share swaps on Subsico's additional investment acquisitions under the following scenario: 194 gain should be recognized for income red, this isan ordinary exchange of property subjectto NewSubsico and 30% Affico, Subsico 1g whether the exchange is solely for stocks, the assumption by the acquiring ‘of the others shall be disregarded. capi share to P10 per share in order to wipe out P24 ero. ‘the P24M reduction in share capital and the resultant elimination of the accumulated deficit shall not be recognized as gain in the book of Tsupeta Company. 195tal Gains Taxation ‘shares received shall be P2,000,000, the same as the (2% span shares exchanged. exchanges, if stocks are exchanged not sole -ks but with other jon such as cash and other propertes, the gal, manok I0SS85 3° up to the extent of cash and other properties received. Chapter 6 - Capital Gains Taxetion Mustratio Re 01 20 Cs ined continuous operating losses which casts doubt about pm rm and long-term commitments. [centered erating with its creditors to convert P40,000,000 debts to eretCsPar value common stocks. Asa result 4,000,000 common. tors. The stocks have a fait value of P11 per share atthe time of restructuring m 1: Gash and property received exceed indicated galt pursuant to the plan of merger between Zambales Inc. and Bataan Inc. ‘was required to surrender his Zambales Inc. shares costing P1,000,000 for Bataan shares with total fair value of P900,000 plus P100,000 cash ted to ‘No gain or loss shall be recognized for the conversion of debt to equity: by the government. After years of dormancy: O worth of goods. government revoke its franchise. Yehey Corporation decided cissolve i Y a nd incorporate as Apollo Global Corporation. Yehey’s PL00N dec id PlOy ration received or selling price bilities are transferred into Apollo Global Corporation. Apollo 004, + P:100,000 + P200,000) P 1,200,000 ‘of stocks exchanged “ zo00000 gain E2000 of cash and other properties received is considered realization of gains to ent of the indicated gain, The excess amount of cash and other properties ar value shares in exchange. No gain shall be recognized on the reincorporation of Yehey Corporation into a ney isa return of capital. Hence, Mustration 6 - reincor yrporation Yehey Corporation is an internet service provider with a franchise to operate “jue to failure to commence operation, thy Its charter charter. INITIAL ACQUISITION OF CONTROL No gain ooaoaaryitalco be recognized if property 1s transferred t0 a corporation for the stocks or units of participation in such ; It of such exchange, said person, alone or together ins control of said corporation. 10,000 gain shall be reported as a capital gain. The substituted basis of the “ 11 mean ownership of stocks in a corporation which amount to at doen he tox voting power ofall classes of stocks entitled to vote This rule may be relevant only tothe capital gains tax or the recognition of capita Ee aot 5c gains when stocks are exchanged in the acquisition of corporate control. shares received ofthe Zambales shares exchanged i dd: Basis of other properties exchanged . The Return of capital sis of the Bataan shares received corporation of which as a resu with others not exceeding four, ga P 1,000,000 0 100.000 B_900,000 m Mr. Gapan exchanged his shares in Cabanatuan Corporation costing P2,000,000 in exchange for the shares of Maharlika Corporation with a fair value of P1,8 transfer resulted in Mr. Gapan acquiring 51% ownership (corporate contr Maharlika Corporation. egulatory Formula on Tax Substituted Basis Total consideration received or selling price P 1,800,000 regulations prescribe the following formula in computing the tax basis of Less: Cost of Cabanatuan stocks exchanged — 2,000,000 arising from the tax-free exchanges: (2_200,000) ‘®: of old shares exchanged P soc don the transfer 0K 00K r properties received — 2a, Pogson 197 Indicated loss licated loss shall not be recognized. Any indicated gain shall not he P200,000 » recognized. The law views initial acquisition of corporate control by not more persons as an investing transaction rather than an income generating transact 196