ACT183: INCOME TAXATION
7) Classification of property transferred shall
I. Classification of Taxpayer’s Properties
A. ORDINARY ASSETS
 Used in business
1) Stock in trade of TP or other real
property
2) Real property held by TP primarily for
sale
3) Real property used in trade or business
(depreciation)
4) Real property used in trade or business
of TP
 Assets held for sale – inventory
 Assets held for use – supplies, PPE
*non-profit entities are not business
B. CAPITAL ASSETS
1) Personal (non-business) assets of individual
TP
2) Business assets of any TP
a) Financial assets – cash, receivables,
prepaid expenses, and investments
Capital gains subject to CGT
b) Intangible assets – patent, copyrights,
leasehold rights franchise rights
*classification of OA & CA – doesn’t depend on nature of
property, but on nature of TP’s business and its usage by
business
*Real and Other Properties Acquired (ROPA)
- OA to banks (even not in realty business)
*ROPA in domestic stocks
- CA to banks (all stocks & securities)
C. Asset Classification Rules
1) Property for future use – OA
2) Discontinuance of active use of property –
business property
3) Real properties used, being used, and have
been previously used in trade – OA
4) OA Properties have not been used in business
for more than 2 years – CA
- para sa nagamit lang (past)
5) Fully depreciated asset – OA
6) Real properties used by an exempt corp for
exempt operations - CA
*exempt corp are not business
depend on whether or not acquirer used it
in business
8) Involuntary transfer (expropriation or
foreclosure sale) – no effect on its
classification
9) from real estate to non-real estate business –
doesn’t change, still OA
*TP habitually engaged in RE business –
registered w/ HLURB or HUDCC and at
least 6 taxable RE sales transactions in
preceding year
*engaged in RE business – always OA even if
discontinued from active use and change
nature of RE business
II. Types of Gains on Dealings in Properties
1) Ordinary Gain – sales of OA;
 RIT
2) Capital Gain – sales of CA
 General rule: RIT
 Exception rule: CGT
1) Domestic stocks sold directly to the buyer
2) Real properties not used in business
Scope of CGT
 Gains on dealings in CA
Gain on the sale, exchange, and other
disposition of domestic stocks
15% CGT
directly to buyer
Sale, exchange, and other disposition
of real property in Phil 6% CGT
Gains from other CA RIT
1) Domestic stocks sold directly to the buyer
 Domestic Stocks
 Evidence of ownership/ rights to
ownership in a DC
 Domestic pag galing sa DC, regardless ng
binentahan
1) Preferred
2) Common
3) Stock rights
 4) Stock options *STT applies regardless of G/L
5) Stock warrants
6) Unit of participation in any *non-dealer in stocks – exempt from CGT or RIT
association, recreation, or *dealer in stocks
amusement club
- Pag binenta, subject to CGT – not subject to STT since stocks are OA to security dealer

- G/L – RIT
 CGT covers NOT only sale of domestic stocks in
cash, but also exchange of domestic stocks in kind
B. Directly to the Buyer
and other dispositions
 Nature of CGT:
1) Foreclosure of property in
1) Universal Tax
settlement of debt
- All TP disposing stocks as CA
2) Pacto de retro sales – w/ buy back
- By situs, gain on sale of domestic
agreement
stocks is within
3) Conditional sales – perfected upon
- tax applies even outside Phil
completion of condition
- LAHAT NG TP AY 15%
4) Voluntary buy back of shares by
2) Annual Tax
issuing corp – redemption of shares
- Imposed on annual net gain on
that may be re-issued and not
sale of domestic stocks
intended for cancellation.
- Held in treasury and later may re-
issued
SP P xx
 The term other disposition does not include:
1) Issuance of stocks by corp Less: Basis of stocks disposed P xx
2) Exchange of stocks for services Selling Expenses xx
3) Redemption of shares in mutual fund
- Exempt by NIRC Docu stamp tax on sale xx xx
4) Worthlessness of stocks
- Worthless value is capital loss, Net Capital Gain (loss) P xx
subject to RIT *documentary stamp tax is deducted if paid by
5) Redemption of stocks for cancellation by seller
issuing corp
- RIT  Selling Price shall mean:
- Gain by investor on redemption of  Cash – total consideration
redeemable preferred shares -  Money & property – sum of money
RIT and FV of property received
6) Gratuitous transfer of stock  Exchanges – FV of property
- Transfer tax, not income tax received
Issuance of stocks including treasuty stocks *FV of building received 2.5M
 Issuance of stock from corp to SH – financing FV of goods received 100,000
transaction (rather than sale)
 Treasury share premium Cash 400,000
– additional capital, not income
- NOT subject to CGT P3,000,000

Tax basis (2,000,000)

III. MODES OF DISPOSING DOMESTIC 1,000,000

STOCKS x 15%
- shares of stocks may be sold,
exchanged or disposed: 150,000

A. through Philippine Stock Exchange (PSE)  Tax basis of stocks shall mean:
 By Purchase – cost of property
- not CGT, but stock transaction tax
- “0.006 x SP” Methods:
 1) Specific identification – shares are
specifically identified
2) Moving average method – books of
accounts
3) First-in, first-out – stocks cannot
be specifically identified
 Devise, bequest, or inheritance – FV of
time of death of decedent
 Gift – lower between FMV at time of
gift and basis in hands of donor, who
didn’t acquire it as gift
 Inadequate consideration – amount
paid by transferee

*Excess of FV over SP – gift subject to donor’s tax (if

intended by seller)

 Under tax-free exchanges – substitute

basis of stocks

Tax compliance

1) Transactional CGT
- Stocks requires BIR tax clearance prior to
transfer of ownership
- Filing of tax returns is pre-condition to tax
clearance
- Capital G/L are required to be reported after
each sale, exchange, and other dispositions
thru CGT return, BIR Form 1707
2) Annual CGT
- 15% CGT is annual tax
- CGT is recomputed on annual net gains and
reported thru final consolidation return
(BIR Form 1707A) on or before 15th day of
4th month following the close of taxable year
of TP

 No loss scenario
- Due to 15% flat rate, no CGT
payable in final consolidation
return if all transactions are gain
- Filing of BIR Form 1707A may not
even necessary
- Annual CGT due = CGT payable

 With loss scenario

 Intra-period loss carry-over procedure

- To avoid overpaying government
- Within 1 taxable year only
 Inter-period carry-over
- Carry-over of capital loss to
succeeding taxable year

*tax code doesn’t allow inter-period carry-over