MODULE 6

Special Income
Taxation
Prepared by Mrs. Nelia I. Tomas, CPA, LPT

INCOME TAXATION Laws. Principles and Applications 2021 OBE Edition by Rex B. Banggawan
Capital Gains Taxation
Part 2
Learning Objectives
After completing the lesson, the students will be able to

01 Understand the features of capital gains taxation

02 Identify the classification of taxpayer’s properties

03 Enumerate the capital gains subject to capital gains tax

04 Discuss the tax on sale of domestic stocks through the PSE

05 Compute for the capital gains tax on certain capital gains

06 Understand capital gains tax exemption under special laws

 Classification of Taxpayers’ Properties
1. Ordinary Assets – 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 taxpayers if on hand at the close of the taxable year
b. Real property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business.
c. Real property used in trade or business of a character which is subject to the allowance
for depreciation
d. Real property used in trade or business of the taxpayer

2. Capital Assets – any asset other than ordinary assets. Basically, capital assets are:
a. Personal (non- business) assets of individual taxpayers
b. Business assets of any taxpayers which are:
 Financial assets such as cash, receivables, prepaid expenses and investments
 Intangible assets such as patent, copyrights and leasehold rights; franchise rights
 Analysis of Properties Held by Taxpayers
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.

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. This is an apparent recognition of the fact that ROPA are normally
acquired and sold by banks in their normal course of business. However, ROPA
in the form of domestic stocks held by banks are capital assets.

For Asset Classification Rules, please see page 174, Income Taxation 2021 Edition by Rex Banggawan
.
 Types of Gains on Dealings in Properties
1. Ordinary Gain – arises from sale, exchange and other disposition including pacto de
retro sales and other conditional sales of ordinary assets.
2. Capital Gain – arises from sale, exchange and other disposition including pacto de
retro sales and other conditional sales of capital assets.

Taxation of gains on Dealings in Properties

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

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 15 % capital gains tax
domestic stocks directly to buyer
Sale, exchange and other disposition of real property 6% capital gains tax
in the Philippines
Gains from other capital assets Regular income tax
 Capital Gain on the 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:
a. Preferred Stocks (participative, cumulative, etc)
b. Common stocks
c. Stock rights
d. Stock options
e. Stock warrants
f. Unit of participation in any association, recreation or amusement club

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 – sale with buy back agreement
3. Conditional sales – sales which will be perfected upon completion of a 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
 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 of 60% of 1% of the selling price
effective January 1, 2018.

Modes of Disposing Domestic Stocks

Shares of Stocks may be sold, exchanged
or disposed:
1. Through the Philippine Stock
Exchange or
2. Directly to buyer
Capital Gains Tax on Sale, Exchange and Other Dispositions of
Domestic Stock Directly to Buyer
01 Nature of the CGT 02 What is the tax basis of stocks?

 Universal Tax  If acquired by purchase, the tax basis is determine

It applies to all taxpayers
disposing stocks classified as
capital assets regardless of
classification of the taxpayer.
 Annual Tax
It is imposed on the annual net
gain on the sale of domestic
stocks directly to buyer
by the following methods in descending order of
priority:
Specific identification
Moving average method
First-in, first out
 If acquired by devise, bequest or inheritance -
the fair value at the time of death of the decedent
 If acquired by gift – lower of the fair value at the
time of gift and the basis in the hands of the donor
 If acquired for inadequate consideration – the
amount paid by the transferee for the property
 If acquired under tax-free exchanges – substituted
basis of the stocks
 The Capital Gains Tax Rate
Tax Rates
NIRC (old law) TRAIN Law
Net gain up to P100,000 5% 15%
Excess net gain above P100,000 10%

The TRAIN law and CREATE law simplified the rate to a 15% flat rate.
Transactional Capital Gains Tax
 Stocks are registrable securities which requires BIR tax
clearance prior to their transfer of ownership.
 Filing of tax returns is a pre-condition to tax clearance.
 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.

Deadline
 The capital gains tax return (BIR Form 1707) shall be
filed within 30 days after each sale, exchange and other
disposition of stocks.
 If the stock is qualified for payment under the installment
method, the tax is due within 30 days after each
installment.
Annualized Capital Gains Tax
The 15% capital gains tax is an annual tax. The CGT is
recomputed on the annual net gains and reported through a
final consolidated return (BIR form 1707A) on or before the
15th day of the fourth month following the close of the taxable
year of the taxpayer.

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

With loss scenario

 If there are losing transactions, it is best to offset first with
subsequent gains.
 Residual tax payable must be settled.
 No tax payment should be made until the same turns into a
net gain.
 Installment Payment of the Capital Gains Tax
Concepts

Qualifications: Formula for Capital Gains Tax

When the domestic stock is sold by installments, the Payable
capital gains tax may also be paid in installments if the:
a. Selling price exceed P1,000; and Capital Gains Tax Payable:
b. Initial payment does not exceed 25% of the selling = Collection/Contract Price x Capital Gains Tax
price

Collection of Tax Due Note

Under this method, the tax will be paid based on the Selling price is used to measure the initial payment
pattern of collection of the contract price. The ratio, but the contract price is used in determining
contract price is the total sum of money collectible the capital gains tax in installment.
from the contract.
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
Concepts
01 Definition
Wash sale of securities is deemed to occur
when within 30 days before and 30 days after
the losing sale of securities (also referred to as
the 61-day period), the taxpayer acquired or
entered into a contract or option to acquire
the same or substantially identical securities.
02 Rationale
Capital loss on wash sale by non-dealer are not
deductible against capital gains because they
are effectively unrealized. The taxpayers did not
totally let go of the shares. The immediate
reacquisition of the shares makes the loss
theoretical or a feigned loss.
03 Substantially identical securities
Securities for the purpose of the 61-day rule
include stocks and bonds.
Substantially identical means that stocks or
bonds of the same class with the same
features.
04 Significance
The wash sale rule has significance on the
recognition of reportable capital losses on
domestic stocks sold directly to buyer.
 Tax Free Exchanges
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.
 Tax Free Exchanges
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 others not exceeding
four, gains control of said corporation.
 “Control” means 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.
 Tax Free Exchanges
Exchange not solely for stocks

 If stocks are exchanged not solely for stocks but with other consideration such as cash and
other properties, the gains but not losses are recognized up to the extent of cash and other
properties received.
 Tax Free Exchanges
Minimum public float requirement of publicly listed corporations

Listed corporations are mandatorily required to maintain a minimum public ownership under Philippine Stock
Exchange (PSE) regulations.

Minimum public ownership is the higher of:

1. The 10% of issued and outstanding shares and
2. The minimum public ownership required by the Securities and Exchange Commission or the Philippine
Stock Exchange

Non- compliance to the minimum public ownership result in the de-listing of the stocks of the corporation in the
PSE. Under RR16-2-12, the sale of listed stocks that 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.
 Persons Not Liable to the 15% Capital Gains Tax
Dealers in Securities

01

Investors in shares of stocks in All other persons whether natural

mutual fund company in
connection with gains realized
02
upon redemption of stocks in the
mutual company.
or juridical, who are specifically
03 exempt from national revenue
taxes under existing investment
incentives and other special laws,
such as:
 Foreign governments and
foreign government-owned and
controlled corporations
 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 classified as capital asset located in the
Philippines is subject to 6% of the selling price or the
fair value, whichever is higher.

Fair value of real property is whichever higher of the:

 Zonal value prescribed by the CIR
 Fair market value in the schedule of the Provincial
and City Assessors.

For the land, the capital gains tax is 6% of whichever

is the highest of the selling price, zonal value or the
Provincial or City Assessors’ fair value.
 Nature of the 6% Capital Gains Tax
1. The capital gains tax applies even if the sale transaction resulted to a
loss. Gain is always presumed to exist.
2. The capital gains tax applies even if the sale is involuntary or is forced by
circumstances.
3. The capital gains tax shall be withheld by the buyer against the selling
price of the seller and remit the same to the government.
Scope and Applicability of the 6% Capital Gains Tax

Sale, Exchange and Exceptions to the 6% Capital Gains Tax

1. Alternative taxation rule – The individual seller of
Other Disposition real property capital assets (sold to government)
of Real Property has the option to be taxed at either 6% capital
Classified as Capital gains tax or regular income tax.

Asset Located in the 2. Exemption rules:

- Exemption under the NIRC
Philippines - Exemption under the special laws
Exemption rules
01 Exemption 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 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
Requisites 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 tax exemption within 30 days of
the sale through a prescribed return (BIR form 1706)
and “Sworn Declaration of Intent.”
5. The reacquisition of the residence must 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.
 Exemption rules
02 Exemption under the Payment of the 6% CGT by Installment
special laws & Deadline for payment of CGT

1. Sale of land pursuant to the
Comprehensive Agrarian
Reform Program
2. Sale of socialized housing units
by the National Housing
Authority
The capital gains tax may be paid by
installment if, under the payment terms, the
initial payment does not exceed 25% of the
selling price. The initial payment refers to the
collection in the taxable year the sale is made.
Deadline for payment of CGT
CGT shall be filed through BIR form 1706
within 30 days from the date of sale or
exchange. For foreclosure sale, within 30 days
from the date of expiration of the applicable
statutory redemption period. When the CGT
qualified for installment payment, it is due 30
days upon receipt of every installment.
 Questions to Ponder:
1. What are the ordinary assets and capital assets? Discuss.
2. Enumerate the two types of capital assets subject to capital gains tax.
3. What are the transactions considered as “other disposition” of domestic stocks? What
transactions are not considered as “other disposition”?
4. Discuss the rules on tax basis of stocks acquired by purchase, inheritance, donation, for in
adequate consideration, and under a tax-free exchange.
5. Enumerate the methods in costing stocks in order of priority.
6. Discuss the compliance requirements of the two-tiered capital gains tax.
7. Explain the concept of a wash sale.
8. Enumerate and discuss the tax-free exchanges.
9. What are the criteria of alternative taxation to the 6% capital gains tax?
10. Enumerate the exemption requirements to the 6% capital gains tax.
11. Discuss the nature of the 6% capital gains tax.
12. Compare the taxpayers covered by the 15% capital gains tax and the 6% capital gains tax.
 Questions to Ponder:
11. Enumerate the methods in costing stocks in order of priority.
12. Discuss the compliance requirements of the two-tiered capital gains tax.
13. Explain the concept of a wash sale.
14. Enumerate and discuss the tax-free exchanges.
15. What are the criteria of alternative taxation to the 6% capital gains tax?
16. Enumerate the exemption requirements to the 6% capital gains tax.
17. Discuss the nature of the 6% capital gains tax.
18. Compare the taxpayers covered by the 15% capital gains tax and the 6% capital gains tax.
 Required Readings
1. Chapters 6, pp.172 – 210:

Banggawan, Rex B. 2021. INCOME TAXATION LAWS, PRINCIPLES, AND

APPLICATIONS. Real Excellence Publishing., Pasay Default Barangay,
Pasay City, Philippines.

2. https://www.bir.gov.ph/index.php/tax-information/capital-gains-tax.html
 Learning Activities
Chapters 6, pp. 211 – 227:

Banggawan, Rex B. 2021. INCOME TAXATION LAWS, PRINCIPLES, AND

APPLICATIONS. Real Excellence Publishing., Pasay Default Barangay, Pasay
City, Philippines.
 References
Banggawan, Rex B. 2021. INCOME TAXATION LAWS, PRINCIPLES AND APPLICATIONS. Real Exc
ellence Publishing., Pasay Default Barangay, Pasay City, Philippines.

BIR Form 0619-F (Monthly Remittance Return of Final Income Taxes Withheld. Retrieved from https://
www.bir.gov.ph/images/bir_files/taxpayers_service_programs_and_monitoring_1/0619-F%20Jan%202
018%20rev%20final.pdf

BIR Form 1601-FQ (Quarterly Remittance Return of Final Income Taxes Withheld. Retrieved from http
s://www.bir.gov.ph/images/bir_files/taxpayers_service_programs_and_monitoring_1/1601-FQ%20final
%20Jan%202018%20rev%20DPA.pdf
 Appendix: Course Materials Evaluation
Adopted: BEST PRACTICES AND SAMPLE QUESTIONS FOR COURSE EVALUATION SURVEYS. Retrieved from
https://assessment.provost.wisc.edu/best-practices-and-sample-questions-for-courseevaluation-surveys//.