Classification of taxpayer’s properties
Ordinary assets
• Stock in trade or real property included in inventory if
on hand at year-end
• Real property held for sale in the ordinary course of
business
• Real property used in business subject to depreciation
• Real property used in business
Capital assets
• Any asset other than ordinary assets
Asset classification is relative
• Assets or properties may be ordinary or capital asset
depending upon the nature of taxpayer’s business
• ROPA is an ordinary asset of bank even if it is not
engaged in realty business
Asset Classification Rules
• Property purchased for future use in business is
ordinary asset even if purpose is thwarted…
• Discontinuance of the active use of property does not
change its character…
• Real properties used in trade is ordinary asset
• Depreciable asset is ordinary asset even if fully
depreciated
• Real properties used by an exempt corporation in its
exempt operation are capital assets
Asset Classification Rules…cont..
• For taxpayers not engaged in real estate business,
ordinary assets are automatically converted to capital
assets upon showing proof that it is not used in business
for more than 2 years prior to the consummation of the
taxable transaction involving such property
• 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
• For real properties subject to involuntary transfer
such as expropriation & foreclosure sale, the
involuntariness of such sale shall have no effect on the
classification of such real property
Types of gains on dealings of properties
• Ordinary Gains • Capital Gains
Taxation of Gains on Property Dealings
Ordinary gains – regular income tax
Capital gains – general rule: regular income tax -
exception rule: capital gains tax
Capital gains subject to capital gains tax
• Capital gains on sale of domestic stock directly to
buyer
• Capital gains on sale of real properties not used in
business
Domestic stocks
• Preferred stocks • Common stocks • Stock rights •
Stock options • Stock warrants • Unit participation in
association, recreation or amusement club
Capital gains tax covers not only sales in cash but also
other dispositions like:
• Foreclosure in settlement of debt
• Pacto de retro sales – sale with buy back agreement
• Conditional sales
• Voluntary buy back of shares by issuing corporation
Other dispositions do not include:
• Issuance of stock by a corporation
• Exchange of stock for services
• Redemption of shares in mutual fund
• Worthlessness of stocks (capital loss)
• Redemption of stocks for cancellation by issuing
corporation
• Gratuitous transfer of stocks
Modes of disposing domestic stocks
• Through the PSE
• Directly to the buyer
Tax on sale of domestic stocks through PSE
• Subject of stock transaction tax (STT) of ½ of 1% of the
selling price (now 6/10 of 1% under TRAIN LAW) if seller
is non-dealer in stocks
• If dealer in stocks, this is subject to regular tax (i.e.,
gain is an item of gross income, loss is deductible)
Tax on sale of domestic stocks directly to buyer
OLD LAW: (still applies to foreign corporations) 5% on
the first P100,000 of the total gain 10% on the excess
over P100,000
TRAIN LAW: (for individuals & domestic corp.) 15% of
net gain
If acquired by purchase, Tax basis is cost of property
determined using the following in descending order of
priority:
• Specific identification • Moving average method
• First in, first out method
If acquired by devise, bequest or inheritance,
• Tax basis is the fair value at the time of death of the
decedent
If acquired by gift,
• 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,
Tax basis is the amount paid by the transferee for the
property
If acquired under tax-free exchanges,
• Tax basis is the substituted basis of the stocks
(discussed under tax-free exchanges, e.g., mergers and
consolidation)
Scope of capital gains tax on shares directly sold to
buyer
• Applies to 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 taxpayer
• Regarded as the most universal rule of income
taxation
Transactional capital gains tax
• Shall be filed using BIR Form 1707 within 30 days after
each sale, exchange or other disposition of stocks
Annualized capital gains tax
• The annual net capital gain or loss is computed as
transactional capital gains less transactional capital
losses
• Transactional capital gains taxes paid during the year
are deducted as tax credit against annual capital gains
tax due
Deadline of annual capital gains tax return
• 15th day on the fourth month following the close of
the taxable year
• BIR Form 1707-A is to be used
Installment payment of capital gains tax on sale of
domestic stocks Conditions:
1. Selling price exceeds P1,000
2. Initial payment does not exceed 25% of the selling
price
Formula of tax payable for each installment:
= (collection/contract price) x total capital gains due
Wash Sales Rule
• Wash sale of securities is deemed to occur when
within 30 days before and 30 days after the sale (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
• Securities for purposes of the 61-day rule include
stocks and bonds
Rationale for wash sales rule
• Intended to prevent taxpayers from feigning
temporary losses which could enable them to
manipulate their reportable taxable net gain
• Not applicable to dealers in securities
Tax free exchanges
Merger or Consolidation
• Gains or losses on share-for-share swaps pursuant to
a plan of merger or consolidation will not be recognized
for taxation purposes
Initial Acquisition of Control
No gain or loss shall also 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 other not exceeding 4, gains
control of said corporation
Exchange not solely for stocks
If stocks are exchanged not solely for stocks but with
other consideration such as cash & other properties, the
gains but not losses are recognized up to the extent of
cash and other properties received.
Minimum public float requirement
• 10% of issued and outstanding shares
• Minimum public ownership required by SEC or PSE
• Sale of listed stocks which fall below minimum public
ownership will be subject to 15% CGT & not the 6/10 of
1% STT
The gain is subject to capital gains tax since it is NOT a
share-for-share swap pursuant to merger/consolidation.
CGT will also apply even in share-for-share swap NOT
pursuant to merger/consolidation.
Tax issue: Sale of stocks dividend-on to a corporate
buyer
• Dividends may escape taxation when stocks are sold
dividend-on by individual taxpayers to a corporate
buyer(domestic corporation will be included in
corporate record of the corporation declaring the
dividend as recipient of dividend & is exempt from
dividend tax)
• Individual seller effectively realizes the entire dividend
income under the cloak of the dividend exemption of
the corporate buyer
• Thus, individual seller shall report the dividend
component of the selling price as part of his income
subject to regular tax
Persons not liable to the 5%-10% (now 15% for
Individuals & domestic corporations)capital gains tax
1) Dealers in securities
2) Investors in shares of stocks in a mutual fund
company w/respect to gains realized on redemption
3) All other persons, not specifically exempt from
national revenue taxes
Sale, exchange & other disposition of real property
classified as capital asset
• Subject to 6% capital gains tax on whichever is higher
between selling price & fair value
• Fair value is the higher of zonal value and assessor’s
market value
BIR Tax Clearance • No registration of any document
transferring real property shall be effected by Register
of Deeds unless capital gains tax is paid
Nature of 6% Capital Gains Tax
• Presumption of capital gains
• Non-consideration to the involuntariness of the sale
Exceptions to the 6% capital gains tax
• Alternative taxation rule
• 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
b. The regular income tax
• Permissible only when,
1. The seller is an individual taxpayer
2. The buyer is the government
Basis of Alternative Taxation
• 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
Exemption to the 6% capital gains tax under NIRC
• Sale, exchange and other disposition of a principal
residence for the purpose of reacquisition of new
principal residence
Requisites for exemption
• Seller must be a citizen or resident alien
• Sale involves the principal residence of seller
• Proceeds is used to acquire new principal residence
• BIR is notified within 30 days from sale of old
residence
• Re-acquisition of new principal residence must be
within 18 months
• Capital gain is held in escrow in favor of the
government
• Can only be availed once every 10 years
• The historical cost or adjusted basis of the principal
residence sold shall be carried over to the new principal
residence built or acquired
Tax Basis of New residence (with full utilization of
proceeds)
• Basis of old residence plus additional cost incurred by
the taxpayer in acquiring the new residence (Cost of
new residence – selling price of old residence)
Capital Gains Tax Exemption Under Special Laws
• Sale of land pursuant to the comprehensive agrarian
reform program
• Sale of socialized housing units by NHA
Payment of 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 selling price
Deadline for payment of capital gains tax
• 30 days from date of sale or exchange
• 30 days from expiration of the applicable statutory
redemption period
• 30 days upon receipt of every installment
Documentary stamp tax on sale of capital assets
• P0.75 for every P200 of the par value of the stocks
sold (now P1.50 for very P200 under TRAIN LAW)
Documentary stamps tax on sale of real properties
• P15 for every P1,000
• Same under TRAIN LAW
• From RR4-2018
Penalties for late/non-filing or nonpayment of capital
gains tax

• Same as other tax obligations

Entities exempt from capital gains tax

• Same as those exempt from final taxes