Chapter 6

Capital Gains Taxation

1
• Classification Of
Taxpayer’s Properties
1. Ordinary Assets- assets used in
business. This includes:
✘ 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
✘ Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business
✘ Real property used in trade or business of a character which is subject to the
allowance for depreciation
✘ Real property used in trade or business of the taxpayer

3
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

4
2. Capital Assets- any assets other than
ordinary assets. Basically, capital assets
are:
1. Personal (non-business) assets of individual taxpayers
2. Business assets of any taxpayer’s which are:
a. Financial Assets- such as cash, receivables, prepaid
expenses and investments
b. Intangible Assets- such as patent, copyrights, leasehold
rights, franchise rights

5
• Analysis of Properties
Held by Taxpayers
 Capital Assets

Business Asset

Ordinary Assets
INDIVIDUAL
TAXPAYERS

Personal Asset
(All are capital assets)

Capital Assets

CORORATE
TAXPAYERS

Ordinary Assets

7
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 taxpayer’s business and its usage by the
business.

8
Example:
1. A domestic stock is an ordinary 2. A vacant and unused lot is an
asset to a dealer in securities but ordinary asset to a taxpayer engaged
is a capital asset to a non-security in the real estate business such as
dealer. realty dealer, realty developer, or
lessor but is a capitalnasset to those
A “dealer in securities” is a merchant of stocks or not engaged in the real estate
securities with a registered place of business,
regularly engaged in the purchase of securities and business.
their re-sale to customers.

9
 The revenue regulations classify real and other
properties acquired (ROPA) by banks as ordinary
assets even if banks are not actually engaged in
the realty business. However, ROPA in the form
of domestic stocks held by banks are capital
assets. Under RR6-2008, “stocks classified as
capital assets” means all stocks and securities held
by taxpayers other than dealers in securities.

10
Asset Classification Rules
A property purchased for future use in business is an ordinary asset even though this
A purpose is later thwarted by circumstances beyond the taxpayer’s control.

Discontinuance of the active use of the property does not change its character
B previously established as a business property.

Real properties used, being used, or have been previously used, in trade of the
C taxpayer shall be considered ordinary assets.

Properties classified as ordinary assets for being used in business by a taxpayer not engaged in the real estate

D 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 transaction involving such
property.

A depreciable asset is an ordinary asset even if it is fully depreciated, or there

E is a failure to take depreciation during the period of ownership.
11
 Real properties used by an exempt corporation in its exempt operations are
F considered capital assets. Exempt corporations are not business.

The classification of property transferred by sale, barter or exchange, inheritance,

G donation, or declaration of property dividends shall depend on whether or not the
acquirer uses it in business.

For real properties subject of involuntary transfer such as expropriation and

H foreclosure sale, the involuntariness of such sale shall have no effect on the
classification of such real property.

Change in business from real estate to non-real estate business shall not change the
I classification of ordinary assets previouly held.

Taxpayers engaged in real estate business includes real estate dealer, real estate developer, real estate lessor and taxpayers habitually
engaged in real estate business.
Taxpayers habitually engaged in real estate business include those registered with the HLURB or HUDCC as dealer or developer or
those with at least 6 taxable real estate sales transaction in the preceding year.

12
Illustration 1- Property previously Illustration 2- Property acquired to
used in business be used in business
Mr. Alfonso has a building which was previously In June 1, 2021, Mr. Alfonso purchased a building
used as an office and is subject to periodic to be used as a branch sales office. The building
allowance for depreciation. In July 1, 2021, Mr. remained idle as of December 31, 2024 due to an
Alfonso implemented a strategic shift in his ongoing civil war.
business operations resulting to the relocation of
its administrative office in another city and the
resultant abandonment of his office.
Case 1: Mr. Alfonso is not engaged in
real estate business
The property shall remain to be an ordinary asset. The two-
year rule applies only to properties which are classified as
ordinary asset for being used in business. A property
Case 1: Mr. Alfonso is not engaged in real purchased for future use in business, even though this is later
thwarted by circumstances beyond the taxpayer’s control, does
estate business not lose its character as an ordinary asset.
Effectively July 2, 2023 (i.e. more than two years from
discontinuance of use), the old office building shall be
reclassified as capital asset upon showing of proof that the same
has not been used for more than two years. Case 2: Mr. Alfonso is engaged in real estate
business
Case 2: Mr. Alfonso is engaged in real estate The property shall remain to be considered as an ordinary asset.
business Properties acquired by taxpayers engaged in real estate business
shall remain to be ordinary asset even if discontinued from active
The old office shall continue to be an ordinary asset despite the
use and even if they change the nature of their real estate
abandonment or idling of the property from active use.
business.

13
Illustration 3- Disposal of property
Juan, a realty dealer, donated one of his house and lot
inventory to his son as dowry for his upcoming marriage. His
son shall use the same as his family residence. He also
donated another house and lot as initial capital of his daughter
who will commence a realty leasing business.

The house and lot shall be considered capital asset to the son because he
will not use it in business. The house and lot donated to the daughter
shall be considered ordinary asset to the daughter because she will use it
in business.

Illustration 4- Exempt non-business

operation
Bantay Tanda Foundation owns Building A-1 which it uses
for its non-profit operations. It also owns another building,
Building A-2, which it leased out to various commercial
lessees.

Building A-1 is a capital asset since it is employed in non-taxable

operations. Building A-2 is an ordinary asset since it is employed in
taxable operations. Non-profit entities are taxable to income tax when
they engage in a profit-oriented or commercial activity.

14
• Types of Gains on
Dealings in Properties
1. Ordinary gain- arises from the sale, exchange and other
disposition including pacto de retro sales and other
conditional sales of ordinary assets.
2. Capital gain- arises from the sale, exchange and other
disposition including pacto de retro sales and other
conditional sales of capital assets.

16
Taxation of Gains on Dealings in
Properties
Type of gains Applicable taxation scheme

Ordinary gains Regular income tax

Capital gains General Rule: Regular Income Tax

Exception Rule: Capital gains tax

17
• Capital Gains Subject to
Capital Gains Tax
Two types of capital gains subject to capital gains tax:

1. Capital gains on the sale of domestic stocks sold directly to buyer

2. Capital gains on the sale of real properties not used in business

19
• Scope of Capital Gains
Taxation
Gains on dealings in capital assets Tax Rates
 Gain on sale, exchange, and other disposition of domestic 15% capital gains tax
stocks directly to buyer
 Sale, exchange, and other disposition of real property in the 6% capital gains tax
Philippines
 Gains from other capital assets Regular income tax
• Capital Gains on the Sale, Exchange and
Other Disposition of Domestic Stocks
Directly to Buyer
Domestic Stocks
- are evidence of ownership or rights to ownership in a domestic
corporation regardless of its features, such as:
• Preferred stocks (participative, cumulative, etc.)
• Common stocks
• Stock rights
• Stock options
• Stock warrants
• Unit of production in any association, recreation, or amusement club (golf,
polo or similar clubs)

23
1. Foreclosure of property in 3. Conditional sales – sales
settlement of debt which will be perfected upon
completion of certain
The capital gains
tax covers not only sales of
specified conditions
domestic stocks for cash but
also exchange of domestic
stocks in kind and other
dispositions such as: 4. Voluntary buy back of
shares by the issuing corporation
2. Pacto de retro sales– – redemption of shares which may
sale with buy back be re-issued and not intended for
cancellation.
agreement

24
The term other dispositions does not include:

✘ Issuance of stocks by a corporation

✘ Exchange of stocks for services
✘ Redemption of share in a mutual fund
✘ Worthlessness of stocks
✘ Redemption of stocks for cancellation by the issuing corporation
✘ Gratuitous transfer of stocks

25
 The issue of stocks to stockholders by a

Issuance of corporation is a financing transaction rather than a

sale transaction. The excess of fair value received
over the par value of shares issued is an additional
stocks capital to the corporation.
Stocks acquired by the corporation from its
shareholders, treasury shares, cannot be
including considered assets or investments in accounting
sense. The excess of the consideration received in

treasury the re-issuance of treasury stocks called treasury

premium is an additional capital and is not income.

stocks

26
 The exchange or issue of stocks for services cannot be
Exchange of stocks for considered as exchange for property. No gain or loss can
be imputed as it involves payment of expense in kind.
services

Gains from redemption of shares in a mutual fund are Redemption of shares in

exempted by the NIRC from income taxation. a mutual fund

Worthlessness of The value of stocks becoming worthless is considered

stocks a capital loss subject to the rules of regular income tax.

27
Redemption of stocks
by the issuing The gratuitous transfers of stocks
corporation either by way of donation inter-vivos
or donation mortis causa is subject
to transfer tax, not to income tax.
Under RR6-2008, any gain or loss on
the mandatory redemption of stocks by
the issuing corporation for the purpose
of stock cancellation shall be subject to
the rules of regular income tax. It should
be noted, therefore, that the gain by the
investor on redemption of redeemable
preferred shares shall be subject to
regular income tax.
Gratuitous transfer of
stocks

28
• Modes of Disposing
Domestic Stocks
 Shares of stocks may be sold, exchanged or disposed:

1. Through the Philippine Stock Exchange(PSE) or

2. Directly to buyer

30
“
The 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 the selling price effective January 1,
2018.

31
Illustration 1: Illustration 1:
Non-dealer in Dealer in
stocks stocks
Mr. San Juan, not a dealer in stocks, sold Assume the same data in the
the following stock investments through previous illustration except that Mr.
the Philippine Stock Exchange: San Juan is a dealer in stocks.

Mr. San Juan shall not be subject to the stock

transaction tax since stocks are ordinary assets to
Date Stock Selling Price Cost Gain(Loss)
a security dealer. The P300,000 ordinary gain
Code and the P100,000 ordinary losses are subject to
4/5/2020 AC P4,000,000 P3,700,000 P300,000 the rules of regular income tax.
4/5/2020 SMB 3,000,000 3,200,000 (200,000)
Total   P7,000,000 P6,900,000 P100,000
The stock transaction shall be computed as follows:

Total selling prices of stocks through PSE P7,000,000

Multiply by: Transaction tax rate 0.6%
Transaction Tax P 42,000

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• Capital Gains on the Sale, Exchange and
Other Disposition of Domestic Stocks
Directly to Buyer
 1. Universal tax
It applies to all taxpayers disposing stocks 2. Annual tax
classified as capital assets regardless of Nature of It is imposed on the annual net gain on the
classification of the taxpayer. By situs, the gain on sale of domestic stocks directly to buyer.
sale of domestic stocks is within. The tax the CGT:
applies even if the sale is executed outside the
Philippines.

34
The net gain is determined as follows:

Selling price P xxx,xxx

Less:
Basis of stocks disposed P xxx,xxx
Selling expenses xxx,xxx
Documentary stamp tax on the sale* xxx,xxx xxx,xxx
Net capital gain(loss) P xxx,xxx

The documentary stamp tax is deducted if paid by the seller.

35
 Selling price shall mean:
• In case of cash sale, the total consideration received per deed of sale
• If total consideration is paid partly in money and partly in property, the sum of
money and fair value of the property received
• In case of exchanges, the fair value of the property received

Illustration
Mr. Real sold his stocks receiving in exchange a building with a tax basis of P2,000,000
but with a fair value of P2,500,000, goods worth P100,000 and P400,000 cash.

The selling price shall be computed as follows:

Fair value of building received P 2,500,000

Fair value of goods received 100,000
Cash 400,000
Total P 3,000,000

36
What is the tax basis of stocks?
o If acquired by purchase, tax basis is the cost of the property which will be determined by the
following methods in descending order of priority:
 Specific identification, if the shares can be specifically identified.
 Moving average method, if books of accounts are maintained by the seller where the transaction of every
particular stock is recorded.
 First-in, first-out method, if the stocks cannot be specifically identified.
o If acquired by devise, bequest, or inheritance, the tax basis is the fair value at the time of death of
the decedent.
o If acquired by gift – the tax basis is the lower of the fair market 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.
o If acquired for inadequate consideration, the tax basis is the amount paid by the transferee for the
property.
o If acquired under tax-free exchanges, the tax basis is the substituted basis of the stocks.

37
 Mrs. Excellence purchased 1,000 shares of Bacolod Corporation
for P100,000 and paid the broker’s commission of P1,000. The
stocks were subject to a chattel mortgage of P10,000 which Mrs.
Excellence assumed.

The cost or basis of the acquired Bacolod stocks shall be:

Cash paid P100,000 Obligations

assumed on the property purchased 10,000
Direct acquisition cost – broker’s commission 1,000
Total cost (Tax basis) P111,000

Illustration 1:
Cost of acquisition
38
 Illustration 2:
Costing procedures The cost of the shares sold shall be
determined as follows:
Mr. Online had the following purchases and sales of shares of
the stocks of El Dorado Corporation:
1.
Date Transaction Shares Price Cost
Assuming Mr. Online identified that the shares sold were those
January 1 Purchase 10,000 P10.00 P100,000 bought on March 1 and March 23, the applicable method is
specific identification method.

March 1 Purchase 5,000 11.03 55,150 Under specific identification, the actual cost of the shares sold
and the remaining stocks shall be:
March 23 Purchase 20,000 12.00 240,000
March 1 purchase 5,000 shares P55,150
March 23 purchase 20,000 shares 240,000
April 4 Sale 25,000 15.00 Cost of 25,000 shares sold P 295,150

Cost of remaining 10,000 stocks P 100,000

The gain shall be computes as:

Selling price (25,000 x P15/share) P375,000

Less: Cost of shares sold 295,150
Gain P 79,850

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 3.
Assuming Mr. Online cannot identify the stocks sold and does not
maintain detailed records of transactions in the shares of El Dorado, the
Assuming Mr. Online cannot identify the shares actually sold but retains applicable method is the First-in, first-out method. The cost of the shares
detailed records of purchase and sale in the stocks of El Dorado, the sold shall be presumed coming from the cost of the first 25,000 shares
applicable method is the moving average method. brought

Under the moving average method, the cost of the shares sold and the
remaining shares shall be computed as follows: Date Transaction Shares Unit Cost Cost
January 1 Purchase 10,000 P 10.00 P 100,000
March 1 Purchase 5,000 11.03 55, 150
March 23 Purchase 20,000 12.00 240,000
Date Transaction Shares Unit Cost Cost     35,000   P 395,150
January 1 Purchase 10,000 P10.00 P100,000
Less: Cost of shares sold:
March 1 Purchase 5,000 11.03 55,150
January 1 purchase 10,000 P 10.00 P 100,000
March 23 Purchase 20,000 12.00 240,000
March 1 purchase 5,000 11.03 55,150
    35,000 P11.29 P395,150
March 23 (25K-10K-5K 10,000 12.00 120,000
Less: Cost of shares sold 25,000 P11.29 (P282,250)
shares first sold)
Quantity and cost of ending 10,000 P11.29 P112,900
  25,000   (P 275,150)
shares
Quantity and cost of ending 10,000 12.00 P 120,000
shares

2.
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 In March 2021, Mrs. REO received by way of donation
shares of stocks of Taal Corporation from her father, Don Bosco. Don
Bosco also acquired the same shares by donation in June 2007 from his
mother, Dona Karena, who brought the shares for P400,000 in April
2014. The shares had a fair value of P700,000 in June 2007 and
P2,500,000 in March 2021.
Assuming the shares were acquired by Mrs. REO from her father by way of:
1.
1. Donation
Assuming the shares were donated by Don Bosco to Mrs. REO in March 2021-
the basis of the shares to Mrs. REO shall be whichever is lower of:
• P400,000 the basis in the hand of the last preceding owner (Dona Karena)
who did not acquire the property by gift, and
• P2,500,000, the fair value at the date of donation, hence, P400,000.
2. Inheritance
Assuming the shares were inherited by Mrs. REO when Don Bosco died in
March 2013, the basis of the shares to Mrs. Lipa shall be P2,500,000 the fair
value at the date of death of Don Bosco.
3. Purchase for an inadequate consideration
Assuming the shares were brought by Mrs. REO from Don Bosco for only
P1,200,000, the basis of the shares to Mrs. REO shall be P1,200,000, the actual
price paid for them.
Illustration 3:
Acquisition by gratuitous title
41
Stocks sold for inadequate consideration
The excess of the fair value of the stocks over the selling price is a gift subject to donor’s tax if so
intended by the seller as a donation.

Illlustration
A seller sold his investment in domestic stocks directly to a friend for P500,000. The shares have a tax basis of P300,000
excluding P10,000 expenses on the date of sale.
Case 1: Assume that the shares are readily marketable with many willing buyer at its fair value of P650,000 but the seller
opted to sell the same to his friend.

Fair value P650,000

Selling price 500,000

}
P150,000 gratuity subject to transfer tax

}
P200,000 gain subject to capital gains tax
Less: Cost and expenses 300,000

Case 1: Assume that the shares have a fair value of P650,000 but the seller is under immediate need of cash forcing him to sell
at a big discount.

In this case, the P200,000 gain will still be subject to capital gains tax but the P150,000 discount shall not be considered
donation subject to donor’s tax since there is no donative intent in this case.

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• The Capital Gains Tax
Rate
The TRAIN law and CREATE law simplified the rate
to 15% flat rate.
Illustration
A taxpayer disposed his investments in domestic stocks costing P100,000 directly to a buyer for P240,000. It
paid on the sale P2,000 and P500, respectively, for broker’s commission and documentary stamp tax expense.
The stocks have a fair value of P300,000 at the date of sale.

The capital gains tax shall be compute as follows:

Selling price P 240,000

Less: Cost and expenses
Purchase cost P 100,000
Commission expense 2,000
Documentary stamp tax expense 500 102,500
Capital gain P 137,500
Multiply by applicable rate: 15%
Capital gains tax due P 20, 625

The P60,000 difference of the P300,000 fair value and P240,000 selling price is a donation subject donor’s tax. It
must be noted that the basis of income tax is the realized gain.

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 Tax Compliance
TRANSACTONAL CAPITAL GAINS TAX
Stocks are registrable securities which require BIR tax clearance prior to their transfer of

1 ownership. Filing of tax returns is a pre-condition to tax clearance. The capital gains or
losses are required after each sale, exchange and other dispositions through the capital
gains tax return, BIR Form 1707.

ANNUAL CAPITAL GAINS TAX

2
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.

45
 No loss
scenario
Due to the flat
15% tax rate, there will be no capital gains tax payable in the final
consolidated return if all transactions during the year resulted to a gain.
Thus, filing of BIR Form 1707 may not even be necessary

46
Illustration:
Assume that the taxpayer had the following disposition of several equity securities directly to a buyer for the fiscal year ending June 30, 2021:

Date Equity Securities Selling Price Cost & Expenses Capital gain (loss)
1/12 Preferred Stock P200,000 P100,000 P100,000
3/18 Common Stocks 100,000 90,000 10,000
5/14 Stock Rights 160,000 70,000 90,000

Computation for transactional compliance

Date Equity Securities Capital gain (loss) CGT rate Transaction CGT
1/12 Preferred Stock P100,000 x15% P15,000
3/18 Common Stocks 10,000 x15% 1,500
5/14 Stocks Rights 90,000 x15% P13,500
Total P30,000

Computation for annual compliance

 
Annual net gain P200,000
Multiply by: CGT tax rate        15%  
Annual capital gains tax due P30,000
Less: transactional capital gains tax paid 30,000    
Capital gains tax payable           0    

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 With loss
scenario
• If there are losing transactions, it is best to offset losses first with
subsequent gains. No tax payment should be made until the same
turns into a net gain.
• The 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 losses incurred.
• The tax code does not allow inter-period carry-over or the carry-over
of capital loss to succeeding taxable year.

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 Illustration:
Assume an individual tax payer had the following transactions during the year:
 
Date Equity Selling Price Cost& Capital gains (loss)
Securities Expense
1/12 Preferred Stock P210,000 P100,000 P110,000
3/18 Common Stocks 80,000 90,000 (10,000)
8/14 Stock rights 160,000 70,000 90,000
11/17 Stock options 80,000 100,000 (20,000)  
Total P170,000  

Computation for transactional compliance

 
For every sales transaction, the taxpayer shall file BIR Form 1707:

Date Deadline Capital gains tax

1/12 2/12 The capital gains tax would simply be 110,000 x 15% = 16,500. Computation for annual compliance
 
3/18 4/17 There would be no capital gains tax payable. The payer will simply file the
Annual net gain P170,000
BIR Firm 1707 indicating there in the 10,000 loss. The 10,000 loss should Multiply by: CGT tax rate        15%   
be carried over in the next transaction. Annual capital gains tax due P25,500
8/14 9/13 The taxable gain shall be 80,000. This is because the loss incurred on 3/18 Less: total transactional CGT    28,500    
which is 10,000 is deducted. Thus, 90,000 – 10,000 = 80,000. The paid (16.5K+12K)
taxpayer shall pay 80,000 x 15% = 12,000. Capital gains tax payable (overpayment)  (P3,000)     
11/17 12/17 There would be no capital gains tax payable. The taxpayer will simply file
BIR Form 1707.

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• Installment Payment of
the Capital Gains Tax
What is the tax basis of stocks?
o If acquired by purchase, tax basis is the cost of the property which will be determined by the
following methods in descending order of priority:
 Specific identification, if the shares can be specifically identified.
 Moving average method, if books of accounts are maintained by the seller where the transaction of every
particular stock is recorded.
 First-in, first-out method, if the stocks cannot be specifically identified.
o If acquired by devise, bequest, or inheritance, the tax basis is the fair value at the time of death of
the decedent.
o If acquired by gift – the tax basis is the lower of the fair market 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.
o If acquired for inadequate consideration, the tax basis is the amount paid by the transferee for the
property.
o If acquired under tax-free exchanges, the tax basis is the substituted basis of the stocks.

51
If domestic stock is sold in instalments, the capital gain tax
may also be paid in instalment if:
o Selling price exceeds 1,000
o Initial payment does not exceed 25% of the
selling price

52
 Illustration:
On November 1, 2021, Mr. Batanes made a sale of domestic stocks costing 700,000 directly to a buyer for 1,000,000.
The buyer agreed to pay in 100,000 monthly instalments starting November 30.
 
The capital gains tax shall be:
 
Note:
Selling Price P1,000,000  Under instalment method, the tax will be paid based on
Less: cost of shares sold   700,000    the pattern of collection of contract price.
Net capital gain P300,000  Contract price- is the total sum of money collectible
Multiply by:          15%    from the contract. Normally, it is the selling price in the
Net capital gains tax due     P45,000   absence of any indebtedness on the shares sold.
 The capital gains tax payable every instalment shall be:
  Collection / contract price x capital gains tax
Situation 1. No mortgage on the shares sold Thus, 100,000 / 1,000,000 x 45,000 = 4,500. The capital
  gains tax payable for every instalment is 4,500.
Initial payment:
 Selling price is used to measure the initial payment
1st instalment (11/30) P100,000
ratio
2 instalment (12/31)
nd
100,000    Contract price is used in determining the capital gains
Total initial payment P200,000   tax in instalment
Ratio of initial payment (200K / 1M) 20%

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Situation 2. With mortgage on stocks but not in excess of cost
Assume the stocks were previously mortgaged for 600,000 which the buyer assumed.
The 400,000 balance is payable in monthly instalments of 100,000 starting November
30, 2021.

The contract price or total sum collectible on the sale shall be:
Selling Price P1,000,000
Less: mortgaged assumed    600,000  
Contract price    P400,000  

The capital gains tax payable every instalment shall be:

100,000 / 400,000 x 45,000 = 11,250

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Situation 3. With excess mortgage over cost
 Assume instead that the stock was subject to 750,000 mortgage which the buyer assumed. The 250,000 balance is payable in monthly
instalments of 50,000 starting November 30, 2021.

The contract price shall be computed:

Selling Price P1,000,000

Less: mortgage assumed    750,000   
Cash collectible P250,000
Constructive receipt (750K
mortgage – 700K basis)      50,000   
Contract price  P 300,000   

The initial payment shall be computed as follows:

Indirect down payment The capital gains tax shall be as follows:
(constructive receipt) P50,000 For the sale : 50,000 / 300,000 x 45,000 = P7,500
1st instalment (11/30) 50,000 For every instalment: 50,000 / 300,000 x 45,000 = P7,500
2nd instalment (12/31) 50,000   
Total initial payment  P150,000  

The ratio of initial payment is 15%.

(150,000 / 1,000,000)

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• Special Tax Rules in
Capital Gain or Loss
Measurement
1. Wash Sales Rule
o Is deemed to occur when within 30 days before and 30 days after the losing sale of securities, the
taxpayer acquired or entered in to a contract or option to acquire the same or substantially identical
securities.
o Capital losses on wash sales by non-dealers in securities are not deductible against capital gains
o The immediate reacquisition of the shares makes the loss a theoretical of a feigned loss.
o Securities for purposes of the 61-day rule include stocks and bond.
o Substantially identical means that stocks or bonds of the same class with the same features.

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Illustration 1. Acquisition of identical shares before a losing sale
 
In 2021, Mr. Donald had the following transactions in the shares of Talisay, Inc., a domestic corporation:

Date Transaction Shares Price Cost

1/5 Purchase 10,000 P4.00 P40,000
3/1 Purchase 10,000 4.10 41,000
3/18 Sale 10,000 3.80
 
*Mr. Donald uses the FIFO method in costing security transactions.*
 
Selling Price P38,000
Less: cost of shares sold 40,000   
Capital loss    P2,000   

Note:
• The 10,000 shares sold on March 18 is from the purchase on January 5 since he uses the first, first out method.
• The 2,000 capital loss shall not be deductible in the computation of the annual net capital gains in 2021 since the shares sold were fully
replaced within 61-day period
• There is full replacement or full cover-up when the quantity of shares acquired in the 61-day period is at least equal to the quantity of the
shares sold.
• The loss shall be deferred and added to the tax basis of the replacement shares

The adjusted basis of the replacement shares acquired on 3/1/21 shall be:
Purchase price P41,000
Add: Deferred loss on 3/18 washes sales  2,000    
Basis of replacement shares  P43,000   
58
 Assume that the shares bought on 3/1/2021 were only 8,000 shares for 32,800.

The capital loss shall be split as follows:

 
What if the Deferred loss (8,000 shares / 10,000 shares x 2,000) P1,600
Deductible loss (2,000 shares / 10,000 shares x 2,000)    400  
Replacement Capital loss
 
 P2,000 

Shares are Only the portion covered with replacement shares shall be disallowed. The portion without
replacement cover is deductible realised loss.

Less than the  

The adjusted basis of the replacement shares acquired on 3/1/21 shall be:

Shares Sold? Purchase price P32,800

Add: deferred loss on March 18 washes sales   1,600     
Basis of 8,000 replacement shares  P34,400 

59
What if by Specific Identification the 10,000 Shares Bought on March 1, 2021
were the Same Shares Sold at a Loss on March 18, 2021?

Wash sales involve the sale of shares at loss, but the same shares were effectively
reacquired before or after the sale by a covering acquisition. In this case, the 2,000
capital loss is not a wash sale loss since there is no acquisition of replacement shares
within 61-day period. Hence, the capital loss is deductible against capital gains.

60
 Illustration 2: Acquisition of identical shares after a losing sale

In 2021, Mrs. Rachelle had the following transactions in the stocks of Sta. Rita Corporation, a domestic
corporation:
 
Date Transaction Shares Price Cost
1/4 Purchase 10,000 P20.00 P200,000
2/28 Sale 10,000 18.00 180,000
3/4 Purchase 12,000 16.00 192,000

The capital gains or capital loss shall be computed:

Selling Price P180,000
Less: Cost of shares sold 200,000   
Capital loss P20,000   

The capital loss of 20,000 shall be deferred and included as part of the cost of the replacement shares because there is a full
replacement within the 61-day period.
 
The basis of the replacement shares purchased on 3/4 shall be:
Purchase Price P192,000
Add: Deferred loss on wash sales   20,000    
Basis of 12,000 replacement shares P212,000   

61
Assume instead that only 7,000 shares were bought on March 4 for 110,000. In this case, the
capital loss shall be split as follows:
 
What if the
Deferred loss (7,000 shares / 10,000 shares x 20,000)
Deductible loss (3,000 shares / 10,000 shares x 20,000)    6,000
P14,000 Replacement
Capital loss
 
P20,000
Shares are
The adjusted basis of the replacement shares acquired on 3/4/20 is:
Less than the
Purchase price P110,000
Add: deferred loss on wash sales   14,000 
Basis of 7,000 replacement shares P124,000 
Shares Sold?

62
Illustration 3: Acquisition of identical shares before
and after a losing sale
In 2021, Mr. Windell had the following transactions in the shares of Naga
Corporation, a domestic corporation:
 
Date Transaction Shares Price/ share Value
1/4 Purchase 15,000 P20.00 P300,000
2/15 Purchase 5,000 21.00 105,000 The adjusted basis of the replacement shares acquired on 2/15/21 shall
2/28 Sale 12,000 18.000 116,000 be:
3/4 Purchase 3,000 16.00 48,000
4/1 Purchase 7,000 14.00 98,000 Purchase price P105,000
Add: deferred loss (5,000 shares/
The capital loss is computed: 8,000shares x 16,000)   10,000     
Basis of the 5,000 replacement
shares on 2/15  P115,000    
(18/share selling price – 20/share cost) x 12,000 shares sold = 24,000
 
This is because the shares sold on 2/28 were the shares bought on
The adjusted basis of the replacement shares acquired on 3/4/21 shall be:
1/4/21.
  Purchase price P48,000
The total shares sold at loss is 12,000 shares while the total replacement Add: deferred loss (3,000 shares/
shares is 8,000 shares; 5,000 shares acquired on 2/15 and 3,000 shares 8,000 shares x 16,000)   6,000    
0n 3/4. Basis on the 3,000 replacement
shares on ¾    P54,000    
Since there is a partial replacement, the capital loss shall be split as
follows:
Deferred loss (8,000 shares / 12,000 shares x 24,000) P16,000
Deductible loss (4,000 shares / 12,000 shares x 24,000)   8,000 
Capital loss  P24,000
63
 Illustration 4: No replacement shares in the 61-day period
On January 18, 2021, Mr. Real bought 10,000 shares of Gen, Luna Corporation for 100,000. On February 6,
2021, he sold the same shares for 95,000. On March 28, 2021, he bought 5,000 shares for 55,000.
 
The March 38 acquisition is beyond the 61-day period, thus there is no acquisition of replacement shares within
the 61-day period. Therefore, the 5,000 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, 2021 shall be 55,000.

64
Rationale of the wash sales rule

The wash sales rule is intended to prevent taxpayers from feigning

temporary losses which could enable them to manipulate their
reportable taxable net gain. Hence, the prohibition against the claim
of wash sales is not an absolute rule but is a form of deferral of loss
intended to reflect the economic substance of the transaction.
 
The wash sales rule is not applicable to dealers in securities as it is a
normal way of business for them to buy and sell stocks and as a
result realized gains or incurs losses within short duration of time.

65
2. Tax- Free Exchanges
a) Corporate Organization
b) Initial acquisition of control

66
 A. Corporate Reorganization
No gains or loss shall be recognized on a corporation or on its stocks or securities if 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 corporation that is a party to the reorganization.

67
 What is Reorganization?
1. A Corporation, which is a party to a merger or consolidation, exchanges property solely for stocks
“Substantially all the
in a corporation, which is a party to the merger or consolidation.
properties of another
corporation”
2. The acquisition by one corporation, in exchange solely for all or part of its voting stocks, or in exchange solely for all or part of the
voting stocks of a corporation which is in control of the acquiring corporation, of stocks of another corporation if, immediately after the means the acquisition by
acquisition, the acquiring corporation has control of such other corporation whether or not such acquiring corporation had control
immediately before the acquisition. one corporation of at least
80% of the assets,
3. The acquisition by one corporation, in exchange solely for all or part of its voting stock, or in exchange solely including cash, of another
for all or part of the voting stocks of a corporation which is in control of the acquiring corporation, of corporation which has the
substantially all of the properties of another corporation.
element of permanence
and not merely momentary
4. A recapitalization or arrangement whereby the stocks and bonds of a corporation are readjusted as to amounts, income or
priority or an agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the holding.
corporation or both.

5. A reincorporation or formation of the same corporate business with the same asset or the same
stockholders surviving under a new charter.

68
 Merger or
Merger consolidation
 Occurs when one corporation acquires all or substantially all of the properties
of another corporation
Consolidation
 Occurs when two or more corporations merged to form one corporation
Securities
 Includes bonds or debentures but does not include notes of whatever class or
duration

The gains or losses on share-for-share swaps pursuant to a plan of merger or consolidation will not
be recognized for taxation purposes. In a share-swap pursuant to 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 acquiring corporation.
 

69
Illustration

Mr.Fernando was required to surrender his Zambales Inc. shares in exchange for Baler shares with total
fair value of 1,200,000 pursuant to the merger of Zambales Inc. and Bataan Inc. The Zambales shares were
previously by Mr. Fernando for 1,000,000.
 
Fair value of Baler shares received (selling price) P1,200,000
Less: Cost Zambales shares exchanged  1,000,000   
Indicated gain    P200,000   
 
The 200,000 indicated gain is not taxable as the exchange involves stocks for stocks. Also,
indicated los shall not be recognized.

70
 Share swap resulting in a
control
The acquisition of control in another corporation achieved by acquisition of
majority of its 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

b) share of its controlling parent corporation

71
Illustration 1: Share swap for control
Subsico is 60% owned by its parent company Parenco and 40% by an investor, Invesco. Subsico also bought and
held as investment shares of Parenco and Invesco. Subsequently, Subsico acquired 30% share ownership in Affico
and 60% share ownership in Newubsico.
 

Invesco Parenco

40% 60%
Subsico

+ 60% + 30%
Newsubsico Affico

72
 Note:
 The exchange of shares resulting in the
acquisition of corporate control is exempt.
 Though apparently silent in the law, Subsico’s
own shares are not its assets. This is equity
issuance rather than a property disposition:
Tax treatment of the foregoing share swaps on hence, no gain should be recognized for income
Subsico’s investment acquisitions: tax purposes
 Since no corporate control was acquired, this is
an ordinary exchange of property subject to
Share Shares given in Income tax income tax (i.e. capital gains tax)
acquisitions exchange status
60% control in Subsico own shares Exempt
Newsubsico Investment in Parenco Exempt
shares
Investment in Invesco Exempt1
shares
30% shares in Subsico own shares Exempt2
Affico Investment in Parenco Taxable3
shares
Investment in Invesco Taxable3
shares
73
Illustration 2: Share swap for control
Assume that after the acquisition of initial 60% Newsubsico and 30% Affico,
Subsico made a second share swap for another 10% of Newsubsico and 25%
Affico. Subsico now have 70% controlling interest in Newsubsico and 55%
controlling interest in Affico.

Tax treatment of the foregoing share swaps:

Share acquisitions Share given in exchange Income tax

status
+ 10% Newsubsico Subsico own shares Exempt
(Increase of Investment in Parenco shares Exempt1
controlling interest) Investment in Invesco shares Exempt1
+ 25% shares of Subsico own shares Exempt
Note:
Affico resulting in Investment in Parenco shares Exempt2
 No gain will be recognized when there is a pre-
55% controlling Investment in Invesco shares Exempt2
interest
existing control pursuant to the second type of
corporate reorganization.
 No gain shall be recognized in the step up
acquisitions resulting in acquisition of corporate
control.

74
Illustration 3. Swap for assets
Assuming further the same data in illustration 1, except that instead of share ownership, Subsico acquired the
warehouse building of Newsubsico and the net assets of Affico by acquiring all its assets and assuming its
liabilities by exchanging shares:

Asset acquisitions Shares given in exchange Income tax status

Warehouse building Subsico own shares Exempt
of Newsubsico Investment in Parenco shares Taxable
Investment in Invesco shares Taxable
Net assets of Affico Subsico own shares Exempt
Investment in Parenco shares Exempt
Investment in Invesco shares Taxable

Note:
 Only the acquisition of substantially all assets of another corporation is
tax-free when parent shares or own shares are given in exchange. The
mere acquisition of an item of assets is subject to tax.
 In determining whether the exchange is solely for stocks, the
assumption by the acquiring corporation of s liability of the others shall
be disregarded.

75
 Illustration 5: Recapitalization
Romeo Company sustained continuous operating losses which casts doubt its
ability to meet short-term and long-term commitments. It entered into a troubled
debt restructuring with its creditors to convert 4,000,000 debts to equity by the
Illustration 4: Recapitalization issuance of 10-par value common stocks. As a result, 4,000,000 common stocks
were issued to creditors. The stocks have a fair value of 11 per share at the time
Tsupeta Company sustained continuous gargantuan of restructuring.
losses forcing it to enter into a capital restructuring
agreement which reduces its par value of stocks No gain or loss shall be recognized for the conversion of debt to equity.
from 100 per share to 10 per share in order to wipe
out 24,000,000 of accumulated losses back to zero.

The 24,000,000 reduction in share capital and the

resultant elimination of the accumulated deficit shall
not be recognized as gain in the book of Tsupeta Illustration 6: Reincorporation
Company.
Yehey Corporation is an internet service provider with a franchise to operate
granted by the government. After years of dormancy due to commence
operation, the government revoke its franchise. Yehey Corporation decided to
dissolve its charter and incorporate as Apollo Global Corporation. Yehey's 100M
assets and 10M liabilities are transferred into Apollo Global Corporation; Apollo
Global issued 100M par value shares in exchange.

No gain shall be recognized on the reincorporation of Yehey Corporation into a

new charter.

76
 A. Initial Acquisiton of Control
No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange
for the stocks or units of participation in such a corporation of which as a result of such exchange, said
person, alone or together with others not exceeding four, gains control of said corporation.

What is control?
Ownership of stocks in a corporation which amount to at least 51% of the total voting power of all
classes of stocks entitled to vote.

77
Mr. Gapan exchanged his shares in Cabanatuan Corporation costing 2,000,000
in exchange for the shares of Maharlika Corporation with a fair value of
1,800,000. The transfer resulted in Mr. Gapan acquiring 51% ownership
(corporate control) in Maharlika Corpopration.

Selling Price P1,800,000

Less: Cost of Cabanatuam stocks exchanged   2,000,000
Indicated loss    ( P200,000) 

Any indicated gain or loss shall not be recognized, thus, the 200,000 indicated
loss shall not be recognized.

Illustratio 78
Exchange not solely for stocks
In tax-free echanges, if stocks are exchanged not solely for stocks but with other
consideration such as cash and other properties, the gains are recognized up to the extent
of cash and other properties received. Losses are not recognized.

Illustration 1. Cash and propery received exceed indicated gain

Assume that pursuant to the plan of merger between Zambales Inc. and Bataan Inc., Mr. Fernando was required to surrender his Zambales Inc. shares
costing 1,000,000 in exchange for Bataan shares with total fair value of 900,000 plus 100,000 cash and 200,000 worth of goods.
 
Selling Price P1,200,000
Less: Cost of stocks exchanged 1,000,000     
Indicated gain    P200,000     
 
The amount of cash and other properties received is considered realization of gains to the extent of the indicated gain. The excess of amount of cash and other
properties received is a return of capital.
 
Realized return on capital (To the extent of the indicated gain) P200,000
Return of capital (in excess of the indicated gain) 100,000     
Total cash and other properties received P300,000     
 
The 200,000 gain shall be reported as a capital gain.The substituted basis of the Bataan shares received in exchange shall be:
 
Basis of Zambales shares exchanged P1,000,000
Add: Basis of other properties exchanged 0
Less: Return of capital    100,000    
Basis of Bataan shares received    P900,000    
79
Regulatory Formula on Tax Substituted Basis
The regulations prescribe the following formula in computing the tax basis of properties arising from the tax-free exchanges:
 
Tax basis of old shares exchanged xxx,xxx
Add: Gain recognized on the transfer xxx,xxx
Less: Cash or other properties received  xxx,xxx   
Tax basis of new shares received  xxx,xxx   
 
Thus, using the regulatory formula, the substituted basis of Bataan shares received:

Tax basis of Zambales shares exchanged P1,000,000

Add: Gain recognized on the transfer 200,000
Less: Cash or other properties received    300,000     
Tax basis of Bataan shares received    P900,000   

80
Illustration 2: Indicated gains exceeds cash and other properties received
Assume that pursuant to the plan of merger between Zambales Inc. and Bataan Inc., Mr. Fernando was required to surrender his Zambales Inc. shares costing
1,000,000 in exchange for Bataan shares with total fair value of 1,050,000 plus 150,000 cash.

Selling Price P1,200,000

Less: Cost of stocks exchanged 1,000,000
Indicated gain P200,000

The indicated gain is recognized to the extent of the cash and / or other properties received. The indicated gain is considered as follows:

Realized gain (up to the value of cash and other properties received) P150,000
Unrealized return on capital (in excess of the value of cash and other properties received) 50,000
Total indicated gain P200,000
 
The substituted tax basis of the Bataan shares received shall be:

Basis of Zambales shares exchanged P1,000,000

Add: Basis of the other properties received 0
Less: Return of capital 0
Basis of Bataan shares received P1,000,000
 
Using the regulatory formula:

Tax basis of Zambales shares exchanged P1,000,000

Add: Gain recognized on the transfer 150,000
Less: Cash or other properties received 150,000
Tax basis of Bataan shares received P1,000,000

81
Minimum public float requirement of publicly listed corporations

Listed corporations are mandatorily required to maintain a minimum public ownership

under PSE regulations. The minimum public ownership is the higher of:
1. The 10% issued and outstanding shares and
2. The minimum public ownership required by the SEC or PSE.
 
Non-compliance to the minimum public ownership shall result in the de-listing of the
stocks of the corporation in the PSE. Under RR16-2012, the sale of listed stocks which fall
below their minimum public ownership requirement will be subject to the 15% capital
gains tax and not to the 6/10 of 1% stock transaction tax.

82
Illustration 1. Sale by a security dealer Illustration 2. Sale of domestic
bonds
Benjamin, a security dealer, sold various domestic
stocks for 1,200,000, net of selling expenses. The stocks Nonoy, not a security dealer, sold domestic bonds
were acquired at a cost of 800,000. directly to a buyer at a net gain of 200,000.
Nonoy is not a dealer of domestic bonds.
The capital gains tax is nil because domestic stocks are  
ordinary assets to a security dealer. The 400,000 net The capital gains tax is nil. The gain on sale of
gain is an ordinary gain subject to regular income tax. domestic bonds is a capital gain subject to
regular income tax. The bond is a debt instrument
rather than an equity instrument like stocks.

83
  
Illustration 4: Issuance of stocks

Iba, Inc., a domestic corporation, issued 10,000 P10-

par ordinary shares in exchange for a vacant lot
Illustration 3: Exchange of stocks for other
owned by KIT, Inc. the vacant lot has fair value of
securities
500,000. Compute the capital gains tax.
 
Debbie Wong, an NRA-NETB-, exchanged her The transaction involves issue by IBA, Inc. of its own
domestic stocks costing 300,000 for bonds with a share of stocks. These stocks do not represent
fair value of 400,000. investment in the shares of another corporation. The
  share premium of P300, 000, [P500, 000- (10,000 x
The 100,000 capital gain is subject to capital gains P10)], is part of Iba’s corporate capital, not an
tax since it is not a share-for-share swap pursuant income. Hence, it is not subject to capital gains tax.
to a plan of merger or consolidation. The same rule
applies for share-for-share swap not pursuant to a
plan of merger or consolidation. Non-resident
persons not engaged in business in the Philippines
such as NRA-NETB and NRFC’s are subject to the
capital gains tax and are required to file the capital
gains tax return.

84
 Illustration 5: Sale of stocks ex-
dividend

Ms. Pearl bought 10,000 shares of Zuma, a domestic corporation, at

P10/shares. On February 14, 2021, Zuma declared a dividend of P2/share
with record date of March 20, 2021 and payment date of April 20, 2021. On
April 2, 2021, Ms. Pearl sold all the shares for P15 per share directly to a
buyer. The selling expenses were P5, 000.
 
Between the date of the record and the date of payment, stocks are said to be
selling ex-dividend. Thus, the capital gain shall be computed as:
 
Total selling price (P15 x 10,000) P150, 000
Less: Cost of stocks and
expenses (P10 x 10,000+P5, 000)    105,000   
Capital gains      P45,000  
 
*the dividends to be received by Ms. Pearl shall be subject to the 10% final
tax to be withheld by Zuma Corporation*

85
1. Dealers in securities

Persons Not Liable

2. Investors in shares of stocks in a mutual fund company
in connection with gains realized upon redemption of
to the 15% Capital
stocks in the mutual company Gains Tax
3. All other persons, whether natural or juridical, who are specifically exempt
from national revenue taxes under existing investment incentives and other special
laws, such as:
a. Foreign governments and foreign government- owned
and controlled corporations
b. Qualified employee trust funds

86
• Sales, Exchange and Other
Disposition of Real Property
Classified as Capital Asset
Located in the Philippines
The sale, exchange and other disposition of real property capital assets in the Philippines
is subject to a tax of 6% of the selling price or the fair value, whichever is higher.
Under the NIRC, the fair value of real property is whichever of the:
a. Zonal value, which is the value prescribed by the Commissioner of Internal Revenue
for real properties for purposes of enforcement of internal revenue laws, and
b. Fair market value, as shown in the schedule market values of the Provincial and City
Assessors.
Note that independent appraisal valuation, the fair value commonly used financial
reporting, is not used in the computation of the capital gains tax.

88
 Terry sold a vacant agricultural land for P5, 000,000. The land was
previously purchased by Terry at P4, 000,000 and had an appraisal
value of P8, 000,000 and zonal value of P7, 000,000. The property
had a fair value of P6, 000,000 in Provincial Assessor's Office and
Illustration 1: an assessed value of P2, 400,000.

Land only The highest of the selling price (P5M), zonal value (7M) and
Assessor's fair value (6M) is the P7, 000,000 zonal values. Hence,
the capital gain tax would be computed P7, 000,000x6%; hence,
P420, 000.

89
 Illustration 2: Land and improvement

Anjo sold his residential house and lot for P5, 000,000. Anjo purchased the lot when it was worth P1,
000,000 and constructed on it the house at a total cost of P2, 500,000. 

The following fair value details were available for the property:

BIR Valuation Assessor’s valuation

Zonal Value Fair Value Assessor’s value
Lot P4,000,000 P3,500,000 P800,000
House N/A 2,000,000 1,200,000

Selling Price   5,000,00   

Zonal Vale Assessor’s fair value Fair value

Land P4,000,000 P3,500,000 P4,000,000
House (improvement) 0 2,000,000 2,000,000
Total fair value (HIGHER) P6,000,000
Multiply by: CGT rate          6%     
Capital gains tax    P360,000 

90
A real property dealer sold a condo unit costing P1, 200,000 to
a client for P1, 500,000. The unit has a fair value of P1,
800,000 at the date of sale.

The capital gain tax is nil. The condo unit is an ordinary asset Illustration 3:
to a realty dealer lessor or developer. The actual gain of P300,
000 (1,500,000 - P1, 200,000) is an ordinary gain subject to
regular income tax.

91
 BIR Tax
Clearance
No registration of any document transferring real property shall be
effected by the Register of Deeds unless the Commissioner or his duly
authorized representative has certified that such transfer has been
reported, and the capital gains or creditable withholding tax, if any, has
been paid. (Sec.58 (E), NIRC)

92
• Nature of the 6% Capital
Gains Tax
 b. Non-consideration to the
a. Presumption of capital gains involuntariness of the sale
The 6% capital gains tax applies even if the The capital gains tax applies even if the c. Final tax
sale is involuntary or is forced by The capital gains tax shall be withheld
sale transaction resulted to a loss. Gain is
circumstances such as in the case of
always presumed to exist. The basis of by the buyer against the selling price of
expropriation sale, foreclosure sale,
taxation is the selling price or fair value the seller and remit the same to the
dispositions by judicial order, and other
whichever is higher, not the actual gain. forms of forced disposition. It also applies government.
to conditional sales and pacto de retro sales

94
• Scope and Applicability of
the 6% Capital Gain Tax
 Location of the property Taxpayers
Individuals Corporations
Within the Philippines All individuals Domestic corporation only
Outside the Philippines Not applicable Not applicable

The 6% capital gains tax is applicable to all individual taxpayers but it applies only to domestic
corporations. The NIRC did not impose final capital gains tax on foreign corporations. However,
in cases where foreign corporations realize gains from the sale of real property classified as
capital assets, the capital gain shall be subject to the regular income tax.

96
• Exceptions to the 6%
Capital Gains Tax
1. Alternative taxation rule
2. Exemption rules
a) Exemption under the NIRC
b) Exemption under special laws

98
1. Alternative Taxation Rule
An individual seller of real property capital assets has the option to be taxed at either:

a) 6% capital gains tax or

b) The regular income tax

Illustration
Gretchen sold to the government a vacant lot for P800, 000. The lot was purchased for P200, 000 in 1980 and had an
Assessor's fair value of P400, 000 and zonal value of P500,000 at the date of sale.

Gretchen may opt to be subject to tax at 6% of P800,000 or report the P600,000 (P800,000-P200,00) actual capital
gain in her annual regular income tax return.

99
 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.

Illustration
An individual taxpayer bought a house and lot near a highway at a cost of P2, 000,000. After several
years, the government invoked its power of eminent domain to buy the property for the expansion of the
highway.

Assuming the property has a fair value of P1, 800,000 for purposes of the expropriation, the
taxpayer would be forced to incur P200,000 loss (1.8M- P2.0M) and still pay the 6% capital gains
tax. This would be too oppressive to the taxpayer. With alternative regular income tax option, the
taxpayer would be given the benefit of deduction of the P200, 000 capital loss without being
imposed the 6% capital gains tax.

100
2.(a) Exemption to the 6% Capital Gains
Tax Under the NIRC
The sale, exchange and other disposition of a principal residence for the re-acquisition of a new
principal residence by individual taxpayers is exempt from the 6% capital gains tax.

Principal residence
Principal residence means the house and lot which is the primary domicile of the
taxpayer. If the taxpayer has multiple residences, his principal residence is
deemed that one shown in his tax declaration

101
 1. The seller must be a
citizen or resident alien.
3. The proceeds of the sale is
utilized in acquiring a new principal
residence.

4. The BIR is duly notified by the taxpayer of

2. The sale involves the his intention to avail of the tax exemption within
principal residence of the 30 days of the sale through a prescribed return
seller tax-payer. (BIR Form 1706) and "Sworn Declaration of
Intent”.

102
 5. The reacquisition of the new 7. The exemption can only be availed
residence must be within 18 months from of once in every 10 years.
the date of sale.

6. The capital gain is held in 8. The historical cost or adjusted basis

escrow in favor of the of the principal residence sold shall be
government. carried over to the new principal
residence built or acquired.

103
Illustration 1
Helen sold her principal residence with fair market value of P6, 000,000 for 5,000,000. Helen purchased the residence for P3,
000,000 several years ago. The imposable capital gains tax is 6% of P6, 000,000 or P360, 000.

Helen should indicate her intention to apply for exemption in the capital gains tax return to be filed and submit a Sworn
Declaration of Intent. She will be required to deposit the P360, 000 capital gains tax in an escrow account in favor of the
government.

Full utilization of proceeds is exempt

Assuming Helen acquires a new principal residence for P5, 200,000 within 18
months, the P360, 000 capital gains tax in escrow will be released to her.

If Helen does not acquire a new principal residence within 18 months, the capital
gains tax inn escrow will be taken by the government.

104
Basis of new residence with full utilization
If the proceeds is fully utilized, the tax basis of the new residence shall be the basis of the old residence plus
additional cost incurred by the taxpayer in acquiring the new residence. The additional cost is the excess of the
purchase price of the new residence over the selling price of the old residence.

Thus, the tax basis of the new residence shall be:

Basis of old residence P3, 000,000

Add: Additional out-of-pocket costs (P5.2M - P5M) 200,000
Basis of new residence P3, 200,000

Tax basis has no relevance for real property capital assets because the actual gain on the sale is irrelevant to capital
gains taxation. However, when the real property capital assets subsequently qualifies as ordinary assets such as
when they are later employed in business, the tax basis of the property becomes necessary for gain or loss
measurement. That's why the basis of the new property needs to be monitored.

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Partial utilization of proceeds is partially exempt
Assume Helen uses only P4, 500,000 out of the P5, 000,000 proceeds in acquiring her new residence. The portion
representing the unused proceeds shall be subject to tax. The capital gains tax held in escrow account including any
accrued interest shall be allocated as follows:

To Helen P 324,000 (P4.5M/P5M × P360, 000) to the

government 36,000 (P0.5M/P5M x P360, 000) Total amount in
escrow P 360,000

Note:
Any interest which might have accrued on the escrow fund shall be released to the taxpayer. The government is
entitled to the amount of the unpaid tax only.

Tax basis of the new residence with less than full utilization
If the proceeds is not fully utilized, the tax basis of the new residence shall be reduced accordingly by
prorating the old basis as follows:

Tax basis of old residence × utilized proceeds / total proceeds

The tax basis of the new principal residence shall be computed as P3, 000,000 x P4, 500,000/P5,
000,000= P 2,700,000
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Illustration 2
Alberto sold his residential lot with fair value of P1, 000,000 for P2, 000,000. He purchased a new
residence for P1, 500,000 within 18 months.

Alberto will be required to pay P120, 000 (P2, 000,000x6%) capital gains tax whether or not he
utilized the proceeds to acquire a new residence.

Illustration 3
Afraid of ghosts that frequently appear in his mansion residence, Raymund left his mansion and
bought a new home for P17, 000,000 as his principal residence. Within 3 months, Raymund was able
to sell his mansion for P40, 000,000.

The sale of the mansion will be subject to 6% capital gains tax. For purposes of the exemption,
the sale of the old residence must be precede the purchases of the new residence.

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 2. (b) Capital Gains Tax Exemption
Under Special Laws
1. Sale of land under the Comprehensive Agrarian
Reform Program 2. Sale of socialized housing units by the National
The sale of agricultural lands by land owners pursuant to Housing Authority
the Comprehensive Agrarian Reform Program of the The sale of socialized housing units for the
government shall be exempt from capital gains tax. underprivileged and homeless citizens by the national
Similarly, interest income on the selling price that may Housing Authority (NHA) pursuant to the Urban
have been agreed by the land owner and the tenant-buyer Development and Housing Act of 1992 is exempt from
shall be exempt from income tax. the capital gains tax.

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• Payment of the 6%
Capital Gains Tax in
Installment
The capital gains tax may be paid in installment if, under the payment
terms, the initial payment does not exceed 25% of the selling price. The
"initial payment" refers to the collections in the taxable year the sale is
made.

Illustration 1: Without mortgage

On December 1, 2016, Ms. Batanes sold for P4, 000,000 unused lot with a cost and fair value of P2,
000,000 and P5, 000,000, respectively. The buyer agreed to pay P500, 000 monthly installment starting
December 31, 2016.
Capital gains tax = P5, 000,000 x 6% P 300,000
Initial payment (December installment) P 500,000
Ratio of initial payment = P500, 000/P4, 000,000 12.50%
The installment sale qualifies under the ratio ceiling; hence, the capital gains tax can be paid in
installment.
The capital gains tax payable every installment shall be P37,500 computed as
P500,000/P4,000,000xP300,000.

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Assume the lot in the previous illustration is mortgaged for P1, 000,000 which the
buyer assumed and the buyer agreed to pay the 3,000,000 balance in P300, 000
monthly installments starting December 31, 2016.

Capital gains tax = P5, 000,000 x 6% P 300,000

Initial payment (December installment) 300,000
Ratio of initial payment (300,000/P4, 000,000) 7.5%

The contract price shall be computed as follows:

Selling price P 4,000,000

Less: Mortgage assumed by buyer 1,000,000
Contract price P 3,000,000

The capital gains tax payable every installment shall be P30,000 computed as
P300,000/P3,000,000 x P300,000 capital gains tax.

Illustration 2: With mortgage not excess of 111

Illustration 3: With mortgage in excess of cost
Assume further that the lot is mortgaged for P2, 500,000 which the buyer assumed and the buyer agreed to pay the P1, 500,000 balances in
P300, 000 monthly installments starting December 31, 2016.
It should be recalled that the excess of the mortgage over the tax basis of the property is an indirect down payment which be included in the
initial payment and contract price. Capital gains tax is P5, 000,000 x 6% or P 300,000.
The contract price shall be computed as follows:

Selling price P 4,000,000

Less: Mortgage assumed 2,500,000
Cash collectible P 1,500,000

Add: Constructivedownpayment-excess mortagage

(P2.5M mortage - P2.0M cost) 500,000
Contract price P 2,000,000

The initial payment shall be computed as:

Constructive down payment (excess mortgage) P 500,000

December 31 installment 300,000
Initial payment P 800,000

Ratio of initial payment = P800, 000/P4, 000,000 20%

The installment plan qualifies under the ratio ceiling; hence, the capital gains tax can be paid in installment.
Under the installment method, the capital gains tax payable shall be:

For the sale : P500, 000/P2, 000,000 x P300, 000 P 75,000

For every installment : P300, 000/P2, 000,000 x P300, 000 P 45,000
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Illustration 4: Initial payment exceeds 25% of selling price
Assume that the initial payment on the sale of Ms. Batanes exceeds 25% of the selling price.

The sale would be taxed as if it were a cash sale. The capital gains tax shall be paid in lump sum upon
filing of the capital gains tax return. This applies without regard to whether or not any mortgage on
the property exceeds the cost of the property disposed.

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Deadline for the Payment of the Capital
Tax
The 6% capital gains tax will be filed through BIR Form 1706 and is due
within 30 days from the date of sale or exchange. For foreclosure sales, it
is due within 30 days from the expiration of the applicable statutory
redemption period. When the tax on the sale is qualified for installment
payment, it is due 30 days upon receipt to every installment.

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• Documentary Stamp Tax on
the Sale of Capital Gains Tax
Installment
 Documentary stamp tax on the sale, exchange, and other
dispositions of domestic stocks directly to a buyer
The sale of domestic stocks is subject to a documentary stamp tax of P1.50 for every
P200 of the par value of the stocks sold. (RA 9243)

Illustration
A taxpayer sold domestic stocks with total par value of P800, 000 for P1, 200,000. The stocks have a
fair value of P1, 250,000 and were acquired for P1, 000,000.

The documentary stamp tax shall be P 6,000 computed as P1.50/P200 x P800, 000.

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 Documentary Stamp Tax on the Sale of Real Properties
The sale of real property capital assets is subject to a documentary stamp tax on the gross selling price
or fair market value whichever is higher.
The documentary stamp tax is P15 for every P1, 000 and fractional parts of the tax basis thereof.
However, if the government is a party to the sale, the basis shall be the consideration paid.

Illustration

A taxpayer disposed a real property capital asset acquired for P2, 000,000 10 years for P4, 000,000. The property
has a zonal value of 5,000,000 and declared real property value per real property tax declaration of P3, 000,000.

The documentary stamp tax shall be computed from the fair value since it is higher than the selling price.
Hence, the documentary stamp tax shall be P75, 000 computed as P15/P1, 000 x P5, 000,000.

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 Penalties for Late/Non-filing or
Non-payment of Capital Gains Tax
The late filing and payment of capital gains tax at the time or times required by law is
subject to the same penalties discussed in Chapter 4.

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Entities Exempt From Capital Gains Tax
The same lists of entities exempt from final tax in Chapter 5 are likewise exempt
from capital gains tax.

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• Comparison of the 6%
CGT and 15% CGT
 6% CGT 15% CGT

Tax object Gain on real property Gain on sale of stocks

Basis of the tax Presumed gain Actual gain

Nature of the tax Final tax Self-assessed tax

Transactional and annual

Frequency of Payment Per transaction
tax

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Thanks!
*End of Slides*
Income Taxation 21
Chapter 6

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PPT by:

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