Republic of the Philippines

President Ramon Magsaysay State University

College of Accountancy and Business Administration
(Formerly Ramon Magsaysay Technological University)
Iba, Zambales, Philippines
Tel/Fax No.: (047) 811-1683

College/Department College of Accountancy and Business Administration

Course Code BA Core 3

Course Title Income Taxation

Place of the Course in the Program Major Subject

Semester & Academic Year First Semester AY 2020-2021

CHAPTER 5-CAPITAL GAINS TAX

Introduction
This Chapter discusses the items of gross Income subject to the capital gains under the NIRC.

Intended Learning Outcomes

1. Differentiate ordinary assets and capital assets

2. Identify the two types of capital gains subject to capital gains tax and their corresponding tax rates and
tax bases
3. Understand the procedural computations of the 5 and 10% capital gains tax and the 6% capital gains tax
4. Knowledge on wash sales and tax-free exchanges
5. Memorize the exceptions to the 6% capital gains tax
6. Apply the documentary stamp tax imposed on the sale of stocks and real properties

Discussion

CLASSIFICATION OF TAXPAYER’S PROPERTIES

1. Ordinary asset- assets used in business, such as:

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 (i.e., buildings and/or improvements) of a character which is
subject to the allowance for depreciation
d. Real property used in trade or business of the taxpayer

64
2. Capital assets - any asset other than ordinary assets. (residual definition)

Asset classification is relative

The classification of assets or properties as ordinary asset or capital assets depends upon the nature of the taxpayer’s
business.

Example:
1. A domestic stock is an ordinary asset to a dealer in securities but is a capital asset to a non- 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 their re-sale to customers.

2. A vacant and unused lot is an ordinary asset to a taxpayer engaged in the real estate business such as realty dealer,
realty developer, or lessor but is a capital asset to those not engaged in the real state business.

Asset Classification
1. A property purchased for future use in business is an ordinary asset even though this purpose is later thwarted by
circumstances beyond the taxpayer’s control.
2. Discontinuance of the active use of the property does not change its character previously established as a
business property.
3. Real properties used, being used, or have been previously used, in trade of the taxpayer shall be considered
ordinary assets.
4. A depreciable asset is an ordinary asset even if it is fully depreciated, or there is a failure to take depreciation
during the period of ownership.
5. Real properties used by an exempt corporation in its exempt operations are considered capital assets.
6. For taxpayers not engaged in the real estate business, ordinary assets are automatically converted to capital
assets upon showing 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.
7. 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 uses it in business.
8. For real properties subject of involuntary transfer such as expropriation and foreclosure sale, the involuntariness
of such sale shall have no effect on the classification of such real property.

All the personal assets of taxpayers not engaged in business are capital assets while the business assets of taxpayers
engaged in business may either be ordinary assets or capital assets by applying the foregoing rules.

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.

Taxation of Gains on Dealings in Properties

65
Type of gain Applicable taxation scheme
Ordinary gains Regular income tax
Capital gains 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:
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

SCOPE OF CAPITAL GAINS TAXATION

Gains on dealings in capital assets Tax Rates
√ Gain on the sale, exchange, and other disposition of domestic stocks 15%capital gains tax
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

Note: CGT for Foreign Corporations-5% to 10%

SALE, EXCHANGE AND OTHER DISPOSITION OF DOMESTIC STOCKS
DIRECTLY TO BUYER

Domestic Stocks
Domestic stocks are evidence of ownership or rights to ownership in a domestic corporation regardless of its
features, such as:
1. Preferred stocks (participative, cumulative, etc.)
2. Common stocks
3. Stock rights
4. Stock options
5. Stock Warrants
6. Unit of participation in any association, recreation, or amusement club (golf, polo or similar clubs)

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

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

66
TAX ON SALE OF DOMESTIC STOCKS THROUGH THE PSE
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.

Illustration 1: Non-dealer in stocks

Mr. San Jose, not a dealer in stocks, sold the following stock investments through the Philippine Stock Exchange:

Date
Stock code Selling price Cost Gain
(loss)
4/5/2014 AC P 4,000,000 P 3,700,000 P 300,000
4/5/2014 SMB 3,000,000 3,000,000 ( 200,000)
Total P 7,000,000 P 6, 900,000 P 100,000

The stock transaction tax shall be computed as follows:

Total selling prices of stocks through the PSE P 7,000,000

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

Note:
1. The stock transaction tax applies on the selling price regardless of the existence of a gains or loss on the sale
transaction.
2. The P58,000 net capital gains, after deduction of the P42,000 transaction tax, is exempt from income tax. It will
no longer be subject to capital gains tax or to regular income tax.

Illustration 2: Dealer in stocks

Assume the same data in the previous illustration except that Mr. San Juanico is a dealer in stocks.

Mr. San Juanico shall not be subject to the stock transaction tax but the P300,000 gain is an ordinary gain reportable
as item of gross income subject to regular income tax. The P100,000 loss is also an ordinary loss reportable as item
of deduction against gross income under the regular income tax.

TAX ON SALE, EXCHANGE, AND OTHER DISPOSITIONS OF DOMESTIC STOCK DIRECTLY TO

BUYER

The net gain on the sale, exchange, and other disposition of domestic stocks directly to a buyer is subject to 15% tax
under the TRAIN LAW.

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

*deducted if paid by the seller

67
 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
consideration received
 In case of exchanges, the fair value of the property received

Illustration
Mr. Roger 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 P400,00 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 consideration or selling price P 3,000,000

What is the tax basis of stocks?

If acquired by purchases, 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 transaction of every particular stock is recorded.
√ First-in, first out method, if the stocks cannot be specifically identified.
 If acquired by devise, bequest, or inheritance, the tax basis is the fair value at the time
of death of the decent.
 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.
 If acquired for inadequate consideration, the tax basis is the amount paid by the
transferee for the property.
 If acquired under tax-free exchanges, the tax basis is the substituted basis of the stocks.

Illustration 1: Cost of acquisition

Mrs. FE purchased 1,000 shares of Sambakol 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. Fe assumed.

The cost or basis of the stocks shall be:

Cash paid P 100,000

Obligations assumed on the property purchased 10,000
Direct acquisition costs - broker’s commission 1,000
Total cost (Tax basis) P 111,000

Illustration 2: Costing procedures

Mr. Han had the following purchases and sales of shares of the stocks of Del Prado Corporation:

68
 Date Transaction Shares Price 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
April 4 Sale 25,000 15.00

The cost of the shares sold shall be determined as follows:

1. Assuming Mr. Han identified that the shares sold were those bought on March 1 and March 23, the applicable
method is specific identification method.

Under specific identification, the actual cost of the shares sold and the remaining stocks shall be:

March 1 purchase 5,000 shares P 55,150

March 23 purchase 20,000 shares 240,000
Cost of 25,000 shares sold P 295,150

Cost of remaining 10,000 stocks P 100,000

2. Assuming Mr. Han cannot identify the shares actually sold but retains detailed records of purchase and sale in
the stocks of El Dorado, the applicable method is the moving average method.

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
35,000 P 11.29 P 395,150
Less: Cost of shares sold 25,000 P 11.29 (P 282,250)
Quantity and cost of ending shares 10,000 P 11.29 P 112,900

Note:
1. Average unit cost =P395,150/35,000 = P11.29
2. Under the moving average method, the average unit cost of the stocks is determined after
every purchased.
3. The cost of ending shares can be computed as 10,000 x P11.29.

Stocks sold below their fair value

The excess of the fair value over the selling price is subject to donor’s tax.

Illustration
Mr. Franco sold his investment in domestic stocks directly to a buyer for P500,000. The shares have a fair value of
P650,000 and P300,000 tax basis and expenses on the date of sale.

69
Fair value P 650,000
P150,000 gratuity subject to transfer tax

Selling price 500,000

P200,000 gain subject to capital gains tax

Less: Cost and expenses 300,000

SCOPE OF THE TWO-TIERED CAPITAL GAINS TAX

The two-tiered capital gains tax applies for all classes of taxpayers, individuals or corporations, regardless of the
place of sale, the identity of the buyer, and the length of time the domestic stocks were held by the taxpayer. Even
NRA-NETBs and NRFCs are required to file the capital gains tax return. Due to this, it is regarded as the most
universal rule in income taxation.

CAPITAL GAINS TAX COMPLIANCE

1. Transactional capital gains
2. Annual capital gains tax

TRANSACTIONAL CAPITAL GAINS TAX

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.

Illustration: Computation of Capital Gains Tax

Greta disposed her investments in domestic stock costing P100,000 directly to a buyer. She paid on the sale P2,000
and P500, respectively, for broker’s commission and documentary stamp tax expense.

Compute the capital gains tax under each of the following conditions:

1. Selling price = P180,000

Selling price P 180,000

Less: Cost and expenses
Purchases cost
Commission expense
Documentary stamp tax expense 500 102,500
Capital gain P 77,500

First P100,000 of gain P 77,500

Multiply by applicable rate: 15%
Capital gains tax due P 11,625

2. Selling price = P240,000

70
 Selling price P 240,000
Less: Cost and expenses 102,500
Capital gain P 137,500
X 15%
Capital gains tax due P 20,625
ANNUALIZED CGT FOR FOREIGN CORPORATIONS

Illustration
Allison, Inc. disposed several equity securities directly to a buyer during its fiscal year ending June 30,
2020:

Capital
Date Equity Securities Price expenses gain(loss) CGT
1/12 Preferred stock P 210,000 P 100,000 P 110,000 P 6,000
3/18 Common stocks 80,000 90,000 ( 10,000 ) -
5/14 Stock rights 160,000 70,000 90,000 4,500
6/17 Stock options 80,000 100,000 ( 20,000 ) -

Total P 170,000 P 10,500

The final capital gains tax payable (refundable) shall be:

Annual net capital gain P 170,000

Less: First P100,000 net gain 100,000 x 5% = P 5,000
Excess net capital gain P 70,000 x 10% = 7,000
Annual capital gains tax due P 12,000
Less: Total transactional capital gains taxes paid 10,500
Capital gains tax payable (refundable) P 1,500

SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS MEASUREMENT

1. Wash sales of stocks
2. Tax-free exchanges
a. Exchange of stocks pursuant to a merger or consolidation
b. Transfer of stocks resulting in corporate control
WASH SALES RULE

Wash sale of securities is deemed to occur when within 30 days before and 30 days after the sale (also referred to as
the 61-day period), the taxpayer acquired or entered into a contract or option to acquire substantially identical
securities. Capital losses on wash sales by non-dealers in securities are not deductible against capital gains.

Day of
Losing sale

Securities for purpose of the 61-day rule include stocks or bonds of the same class with the same features. A
common stock is not substantially identical to a preferred stock. Participating and non-participating preferred stocks
are not substantially identical.

71
Illustration 1: Acquisition of identical shares before a losing sale
In 2020, Mr. Toledo had the following transactions in the shares of Talisay, Inc, a domestic corporation:

Date Transaction Shares Price

Cost
January 5 Purchase 10,000 P 4.00 P 40,000
March 1 Purchase 10,000 4.10 41,000
March 18 Sale* 10,000 3.80

*Those purchased January 5, 2020

The capital gain or loss on March 18, 2020 shall be computed as follows:

Selling price P 38,000

Less: Cost of shares sold 40,000
Capital loss P 2,000

Pursuant to the wash sales rule, the P2,000 capital loss on the sale shall not be deductible in the computation of the
annual net capital gains in 2020 since the shares sold were fully replaced within 61-day period.

There is full replacement or full cover-up when the quantity of the shares acquired in the 61-day period is at least
equal to the quantity of the shares sold. In this case, the loss is deferred and is added to the tax basis of the
replacement shares.

The adjusted basis of the replacement shares acquired on March 1, 2020 shall be:

Purchase price P 41,000

Add: Deferred loss on March 18 wash sales 2,000
Basis of replacement shares P 43,000

What if the replacement shares are less than the shares sold?
Assume that the shares bought on March 1, 2020 were only 8,000 shares for P32,800.
Only the portion without replacement cover is a deductible realized loss. Thus, the capital loss shall be split as
follows:

Deferred loss (8,000 shares/10,000 shares x P2,000) P 1,600

Deductible loss (2,00 shares/10,00 shares x P2,000) 400
Capital loss P 2,000

The adjusted basis of the replacement shares acquired on March 1, 2016 shall be:

Purchase price P 32,800

Add: Deferred loss on March 18 wash sales 400
Basis of 8,000 replacement shares P 34,400

What if the 10,000 shares bought on March 1, 2020 were the same share sold at a loss on March 18, 2020?
Note that wash sales involve the sale of shares at a loss, but the same shares were effectively re-acquired before or
after the sale by a covering acquisition.

72
In this case, the P2,000 capital loss is not a wash sales loss since there is no acquisition of replacement shares within
the 61-day period. Hence, the capital loss is deductible against capital gains.

Illustration 2: Acquisition of identical shares after a losing sale

In 2019, Mr. Hiya had the following transactions in the stocks of Sta. Rita Corporation, a domestic corporation.

Date Transaction Shares Total

January 4 Purchase 10,000 P 20.00 P 200,000
February 28 Sale 10,000 18.00 180,000
March 4 Purchase 12,000 16.00 92,000

The capital gains or capital loss shall be computed as follows:

Selling price P 180,000

Less: Cost of shares sold 200,000
Capital loss (P 20,000)

Since there is a full replacement cover (i.e. 12,00 shares) within the 61-day period (I.e., March 4, 2019), the capital
loss shall be deferred and included as part of the cost of the replacement shares.

The basis of the replacement shares purchased on March 4 shall be:

Purchase price P 192,000

Add: Deferred loss on wash sales 20,000
Basis of 12,000 replacement shares P 212,000

What if replacement shares are less than the shares sold?

Assume instead that only 7,000 shares were bought on March 4 for P110,000. In this case, the capital loss shall be
split as follows:

Deferred loss (7,000/10,000 x P20,000) P 14,000

Deductible loss (3,000/10,000 x P20,000) 6,000
Capital loss P 20,000

The adjusted basis of the replacement shares acquired on March 4, 2019:

Purchase price P 110,000

Add: Deferred loss on wash sales 14,000
Basis of 7,000 replacement shares P 124,000

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.

Reminder: The wash sales rule is not applicable to dealers in securities as it is normal business for them to buy and
sell stocks and realize gains or incur losses within short periods of time.

73
TAX FREE EXCHANGES

Merger or Consolidation
Stockholders of a domestic corporation may exchange their stocks for the stocks of another corporation pursuant to a
plan of merger or consolidation.

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.

In effect, the transaction merely involves a replacement of shares of stocks of the shareholders of the absorbed
corporation with them being simply integrated as shareholders of the acquiring corporation.

The substituted tax basis of the Baler shares received shall be:

Basis of the Froilan shares exchanged P 1,000,000

Add: Basis of other properties exchanged 0
Less: Return of capital 0
Basis of the Baler shares received P 1,000,000

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 P xxx,xxx

Add: Gain recognized on the transfer xxx,xxx
Less: Cash or other properties received xxx,xxx
Tax basis of new shares received P xxx,xxx

If we apply this formula to the two previous illustrations, we would come up with essentially the same tax bases as
computed.

Comprehensive Illustrations

Illustration 1: Sale by a security dealer

Benj, a security dealer, sold various domestic stocks for P1,200,000, net of selling expenses. These stocks were
acquired at a cost of P800,000.

The capital gains tax is nil because domestic stocks are ordinary assets to a security dealer. The P400,000 net gain is
an ordinary gain subject to regular income tax.

Illustration 2: Sale of domestic bonds

Carl, not a security dealer, sold domestic bonds directly to a buyer at a net gain of P200,000. Carlo is not a dealer of
domestic bonds.

The capital gain tax is nil. The gain on the sale of domestic bonds is a capital gain subject to regular income tax.

Illustration 3: Exchange of stocks for other securities

Deb, an NRA-NETB, exchanged her domestic stocks costing P300,000 for bonds with a fair value of P400,000.

74
The P100,000 capital gain is subject to capital gains tax since it is not a share-for-share swap pursuant to a plan of
merger or consolidation. The same rule applies for a 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-NETBs and NRFCs are
subject to the capital gains tax are required to file a capital gains tax return.

Illustration 4: Issuance of stocks

HK Inc., a domestic corporation, issued 10,000 P10-par ordinary shares in exchange for a vacant lot owned by KIT,
Inc. The vacant lot has fair value of P500,000. Compute the capital gains tax.

The transaction involves issue by HK Inc. Of its own shares of stocks. These stocks do not represent investment in
the shares of another corporation. The share premium of P300,000, [P500,000 - (10,000 x P10)], is part of HK’s
corporate capital, not an income. Hence, it is not subject to capital gains tax.

Persons not liable to the 15% capital gains tax

1. Dealers in securities
2. Investors in shares of stocks in a mutual fund company in connection with gains realized
upon redemption of stocks in the mutual company
3. All other persons, whether natural or juridical, who are specifically exempt from national
revenue taxes under existing investment incentives and other special laws

Examples:
a. Foreign governments and foreign government-owned and controlled corporations
b. Qualified employee trust funds

SALE, 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 is higher 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. Assessed value, which is the value prescribed by the City or Municipal Assessor’s Office for
purposes of the real property tax

Zonal value exists only for land, but assessed value is prescribed separately for land and improvements.

For lands, the capital gains tax is 6% of whichever is the highest of the selling price (bid price in the case of
foreclosure sales), zonal value, or assessed value.

Note that independent appraisal valuation, the fair value commonly used in external financial reporting, is not used
in the computation of the capital gains tax.
Illustration 1
Ter sold a parcel of land for P5,000,000. The land has an appraisal value of P8,000,000 zonal value of P6,000,000,
assessed value of P5,000,000 and was previously purchased by Ter for P4,000,000.

75
The highest of the selling price, zonal value is the P6,000,000 zonal value. Hence, the capital gains tax would be
computed P6,000,000 x 6%; hence, P360,000. It should be emphasized that the independent appraisal value is not
used.

Illustration 2
Anj sold his residential house and lot for P5,000,000. Anj 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 lot has a zonal value of P4,000,000 and assessed value
of P2,500,000. The house had an assessed fair value of P2,000,000.

Selling price P 5,000,000

Fair value of land (P4M or 2.5M w/e is higher) P 4,000,000

Assessed fair value of improvement 2,000,000
Fair market value (HIGHER) P 6,000,000

The capital gains tax shall be computed at 6% x P6,000,000 or P360,000.

Illustration 3
A real property dealer sold a condo unit costing P1,200,000 to a client for P1,500,000. The unit has a total assessed
value of P900,000 and zonal value of land and assessed value on improvements of P1,000,000 at the date of sale.

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

NATURE OF THE 6% CAPITAL GAINS TAX

a. Presumption of capital gains
The 6% capital gains tax applies even if the sale transaction resulted to a loss Gain is always presumed to exist.
The basis of taxation is the selling price or fair value whichever is higher, not the actual gain.

b. Non-consideration to the involuntariness of the sale

The capital gains tax applies even if the sale is involuntary or is forced by circumstances such as in the case of
expropriation sale, foreclosure sale, dispositions by judicial order, and other forms of forced disposition. It also
applies to conditional sales and pacto de retro sales.

SCOPE AND APPLICABILITY OF THE 6% CAPITAL GAINS TAX

Location of the Taxpayers

property
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.
Interestingly, the NIRC did not impose final capital gains tax on foreign corporations. However, in cases where

76
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.

Under the NIRC, the sale of real property located abroad is not covered by the capital gains tax. Hence, the actual
gains on the sale, exchange, and other dispositions of properties abroad are subject to the regular income tax if the
taxpayer is taxable on global income such as resident citizens and domestic corporations. For all other taxpayers, the
capital gain realized abroad is exempt.

EXCEPTIONS TO THE 6% CAPITAL GAINS TAX

1. Alternative taxation rule
2. Exemption rules
a. Exemption under the NIRC
b. Exemption under special laws

ALTERNATIVE TAXATION
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

It should be noted that this is permissible only when:

1. The seller is an individual taxpayer, and
2. The buyer is the government, its instrumentalities or agencies including government-
owned and controlled corporations

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

Gretch 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.

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 (P1.8M-P2.0M) and still pay the 6% capital gains tax. This would be too oppressive to
the taxpayer. With the alternative regular income tax option, the tax payer would be given the benefit of deduction
of the P200,000 capital loss without being imposed the 6% capital gains tax.

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

77
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 latest tax declaration.

Requisite of exemption:
1. The seller must be a citizen or resident alien.
2. The sale involves the principal residence of the seller-taxpayer
3. The proceeds of the sale is utilized in acquiring a new principal residence
4. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption within 30 days of the
sale through a prescribed return (BIR Form 1706) and “ Sworn Declaration of Intent.”
5. The reacquistion of the new residence must be be within 18 months from the date of sale.
6. The capital gain is held in escrow in favor of the government.
7. The exemption can only be availed of once in every 10 years.
8. The historical cost or adjusted basis of the principal residence sold shall be carried over to
the new principal residence built or acquired.

It must be emphasized that the sale principal residence must precede the acquisition lof the new principal residence
to be exempt. (BIR Ruling No. 038-2015)

Illustration
Helena sold her principal residence with a fair market value of P6,000,000 for P5,000,000. Helena purchased the
residence for P3,000,000 several years ago. The imposable capital gains tax is 6% of P6,000,000 or P360,000.

Helena 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 be 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 in escrow will be taken
by the government.

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 P 3,000,000

Add: Additional out-of-pocket costs (P5.2M-P5M) 200,000
Basis of new residence P 3,200,000

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.

Partial utilization

78
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 x 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 as follows:

Tax basis of old residence x utilized proceeds / total proceeds

Thus, the tax basis of the new principal residence shall be computed as follows:

P3,000,000 x P4,500,000/P5,000,000= P2,700,000.

Another illustration
Albert 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.

Albert will be required to pay P120,000 (P2,000,000 x 6%) capital gains tax whether or not be utilized he utilized
the proceeds to acquire a new residence. The same shall be the rule assuming Albert sold his principal residence for
the acquisition of a new principal residence.

CAPITAL GAINS TAX EXEMPTION UNDER SPECIAL LAWS

1. Sale of land pursuant to the Comprehensive Agrarian Reform Program
2. Sale of socialized housing units by the National Housing Authority

Sale of land under the Comprehensive Agrarian Reform Program

The sale of agricultural lands by land owners pursuant to the Comprehensive Agrarian Reform Program of the
government shall be exempt from capital gains tax. Similarly, interest income on the selling price that may have
been agreed by the land owner and the tenant-buyer shall be exempt from income tax.

Sale of socialized housing units by the National Housing Authority

The sale of socialized housing units for the underprivileged and homeless citizens by the National Housing
Authority (NHA) pursuant to the Urban Development and Housing Act of 1992 is exempt from the capital gains tax.

This exemption is limited to socialized housing units only. The BIR ruled that the sale of the NHA of commercial
lots which is not part of the socialized housing project for the poor and homeless is subject to capital gains tax or
regular tax and documentary stamp tax.

To qualify for exemption, the socialized housing units of the NHA must comply with price ceilings set by the NIRC
and other special laws.

Deadline for payment of the capital gains tax

79
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 of every
installment.

Statutory redemption period on foreclosure sale

Foreclosed properties are subject to a right of redemption by individual mortgagor within one year counted not from
the date of sale but from the time of registration of the sale in the Office of the Registry of Deeds. (Santos vs.
Register of Deeds of Manila)

For juridical persons, redemption must be made before the registration of the certificate of foreclosure sale with the
applicable Register of Deeds or within 3 months from foreclosure, whichever is earlier.

DOCUMENTARY STAMP TAX ON THE SALE OF CAPITAL ASSETS

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 six months ago.

The documentary stamp tax shall be P 6,000 computed as P1.50/P220 x P800,000.

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 ago for P4,000,000. The property
has a zonal value of P5,000,000 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.

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 the previous chapter.

ENTITIES EXEMPT FROM CAPITAL GAINS TAX

The same lists of entities exempt from final tax are likewise exempt from capital gains tax.

Exercises

80
1. Mr. Rob, a non-resident alien, sold domestic stocks directly to buyer at a gain of P80,000. Compute the
capital gains tax.______________________
2. Ms. Rose, a non-resident citizen, sold domestic stock rights directly to buyer at a gain of P300,000.
Compute the capital gains tax.______________________
3. Mr. Billy sold shares of a resident foreign corporation directly to buyer. The shares were purchased foe
P100,000 and were sold for P210,000. Compute the capital gains tax.___________________
4. Jade sold domestic shares directly to buyer. The following relates to the sale:
FMV of shares P400,000
Selling price 300,000
Par value 200,000
Cost 150,000
Compute the capital gains tax_________________________

5. Mr. Ba exchanged his stock investment in the Stocks of Carrera Corporation for the shares of stock of Fried
Corporation. The stocks acquired by Mr. Ba represent 60% of the stocks of Fried Corporation. What is the
capital gains tax?_____________________
6. In the immediately preceding problem. What is the basis of the stocks received by Mr. Ba?___________
7. A non-security dealer sold domestic stocks directly to buyer on October 1, 2020 under the following terms:
Selling price P500,000
Cost 200,000
Par value 150,000
Downpayment 10%
Installments in 2020 50,000

Compute the total CGT in 2020._________________

8. Compute the documentary stamp tax in the preceding problem.______________

9. A wash sale of domestic shares wherein 20,000 shares was disposed at a loss of P40,000 were subsequently
covered-up within the 30 day period by a purchase of 15,000 shares for P10/share. The deductible capital
loss against capital gain on the wash sale is________________________
10. What is the cost of the 15,000 shares acquired in the preceding problem?____________________

81