Capital Gains Tax

(CGT)
LOYD JUPPET O. JORCA, CPA
February 01, 2024
 CONTENTS

Asset classification is
01 CLASSIFICATION OF TAXPAYER'S 02 relative
PROPERTIES

CAPITAL GAIN ON THE

03 TYPES OF GAINS ON 04 SALE, EXCHANGE AND
DEALINGS IN PROPERTIES
OTHER DISPOSITION OF

05 SALE, EXCHANGE, AND OTHER

DISPOSITION OF REAL PROPERTY
DOMESTIC STOCKS
DIRECTLY TO BUYER
CLASSIFIED AS CAPITAL ASSET
LOCATED IN THE PHILIPPINES (15%)
(6%)
 CLASSIFICATION OF TAXPAYER'S
01 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 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 of a character which is subject to the allowance for depreciation

d. Real property used in trade or business of the taxpayer.

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

Business is habitual engagement in a commercial activity involving the regular sale of goods or

services for a profit. Non-profit entities are not businesses.

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

 01 2. Capital assets -
any asset other than ordinary assets.

Basically, capital assets are:

1. Personal (non-business) assets of individual taxpayers

2. Business assets of any taxpayers which are:

a. Financial assets such as cash, receivables, prepaid expenses and investments

b. Intangible assets- such as patent, copyrights, leasehold rights, franchise rights

 01 02 03 04
Personal Personal Capital Real Ordinary Real Capital
Ordinary Asset Asset Asset Asset
-Regular Income Tax -Regular Income Tax -Regular Income Tax -Capital Gains Tax
 Asset classification is relative
02
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 1 and
its usage by the business.2

1. DOMESTIC STOCKS

Ordinary Asset- Dealer of securities

Capital Asset for non-dealer

2. Vacant and unused lot

Ordinary Asset for Real Estate businesses

Capital Asset for those not engaged in real estate

 Asset classification is relative
02
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 1 and
its usage by the business.2

Interestingly, 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. Under

RR6-2008, "stocks classified as capital assets" means all stocks and securities held by taxpayers

other than dealers in securities.

 02 Asset classification rules

A. 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.

B. Discontinuance of the active use of the property does not change its character previously

established as a business property.

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

considered ordinary assets.

D. Properties classified as ordinary assets for being used in business by a taxpayer not engaged in

the real estate 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.

E. 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.

 02 Asset classification rules

F. Real properties used by an exempt corporation in its exempt operations are considered capital

assets. Exempt corporations are not business.

G. 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.

H. 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.

I.Change in business from real estate to non-real estate business shall not change the classification

of ordinary assets previously held.

 TYPES OF GAINS ON DEALINGS IN
03 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.
 01 02 03 04
Personal Personal Capital Real Ordinary Real Capital
Ordinary Asset Asset Asset Asset

Ordinary Gains Capital Gains Ordinary Gains Capital Gains

(Dealings in
Properties)
-Regular Income Tax -Regular Income Tax -Regular Income Tax -Capital Gains Tax
 CAPITAL GAINS SUBJECT TO CAPITAL GAINS
03 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

not traded in the local stock exchange (PSE). (15%)

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

(Only those located in PH) (6%)

Note: The TRAIN law changed the two-tiered tax structure (5% and
10%) capital gains tax to a flat 15% tax effective January 1, 2018.
 CAPITAL GAIN ON THE SALE, EXCHANGE
04 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)
 CAPITAL GAIN ON THE SALE, EXCHANGE
02 AND OTHER DISPOSITION OF DOMESTIC
STOCKS DIRECTLY TO BUYER
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 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
 CAPITAL GAIN ON THE SALE, EXCHANGE
02 AND OTHER DISPOSITION OF DOMESTIC
STOCKS DIRECTLY TO BUYER

The term other disposition does not include:

1. Issuance of stocks by a corporation
2 . Exchange of stocks for services
3. Redemption of shares in a mutual fund
4. Worthlessness of stocks
5. Redemption of stocks for cancellation by the issuing corporation
6. Gratuitous transfer of stocks
 MODES OF DISPOSING DOMESTIC STOCKS
02

Shares of stocks may be sold, exchanged or disposed:

1. Through the Philippine Stock Exchange (PSE) or

2. Directly to buyer

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 effective January 1,
2018. The old law imposed a rate of 50% of 1% on the selling price.
Regardless of loss or gain.
 MODES OF DISPOSING DOMESTIC STOCKS
02

Illustration 1: Non-dealer in stocks

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

Date Stock Code Selling Price cost Gain (Loss)

4/5/2020 AC P 4,000,000 P 3,700,000 P300,000

4/5/2020 SMB 3,000,000 3.200.000 (200,000)

Total P 7.000.000 P 6,900,000 P 100.000

Stock transaction Tax: 7 million x 60% x 1% = 42,000

 MODES OF DISPOSING DOMESTIC STOCKS
02

Illustration 1: Non-dealer in stocks

Mr. San Juan, a dealer in stocks, sold the following stock investments
through the Philippine Stock Exchange:

Date Stock Code Cost Selling price Gain (Loss)

4/5/2020 AC P 4,000,000 P 3,700,000 P300,000

4/5/2020 SMB 3,000,000 3.200.000 (200,000)

Total P 7.000.000 P 6,900,000 P 100.000

Ordinary Asset- subject to Regular Income Tax (RIT)

 CAPITAL GAINS TAX ON SALE, EXCHANGE,
02 AND OTHER DISPOSITIONS OF DOMESTIC
STOCK DIRECTLY TO BUYER

Nature of the CGT:

1. Universal tax

It applies to all taxpayers disposing stocks classified as capital

assets regardless of classification of the taxpayer. By situs, the gain
on sale of domestic stocks is within. The tax applies even if the the
sale is executed outside the Philippines.

2. Annual tax

It is imposed on the annual net gain on the sale of domestic stocks

directly to buyer.
 CAPITAL GAINS TAX ON SALE, EXCHANGE,
02 AND OTHER DISPOSITIONS OF DOMESTIC
STOCK DIRECTLY TO BUYER
Selling price XXX
Less:
Basis of stocks disposed XXX
Selling expenses XXX
Documentary stamp tax on the sale XXX XXX
Net capital gain (loss) XXX

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

Costing Procedures:
1. Specific Identification Method
2. Moving Average Method
3. First in- First out method
 CAPITAL GAINS TAX ON SALE, EXCHANGE,
02 AND OTHER DISPOSITIONS OF DOMESTIC
STOCK DIRECTLY TO BUYER
THE CAPITAL GAINS TAX RATE

Tax Rates
NIRC (old law) TRAIN Law

Net gain up to P100,000.00

Excess net gain above P100,000
5%
10% 15%
The NIRC imposed the two-tiered 5%-10% capital gains tax to all
taxpayers regardless of classification. The TRAIN law simplified the rate to
a flat 15% rate but retained the old two-tiered 5%-10% tax structure for
foreign corporations.

Consequently, there are two CGT rates now:

a. Foreign corporation - 5% & 10% CGT
b. Individuals and domestic corporations - 15% CGT
 CAPITAL GAINS TAX ON SALE, EXCHANGE,
02 AND OTHER DISPOSITIONS OF DOMESTIC
STOCK DIRECTLY TO BUYER
Tax compliance:

1. Transactional Capital Gains Tax

2. Annual capital Gains Tax

1. Transactional Capital Gains Tax

BIR Form 1707

Deadline: 30 DAYS after sale, exchange, and other disposition. If qualified

for installment, 30 days after the installment payment.

2. Annual Capital Gains Tax

BIR Form 1707-A

Deadline: 15Tth day of the 4th month following the close of the taxable
year
 INSTALLMENT PAYMENT OF CAPITAL GAINS
02 TAX?

A. SELLING PRICE EXCEEDS P1,000.00

B. INITIAL PAYMENT DOES NOT EXCEED 25%
 SPECIAL TAX RULES IN CAPITAL GAIN OR
02 LOSS MEASUREMENT.

1. WASH SALES OF STOCKS

2. TAX FREE EXCHANGES
A. EXCAHNGE OF STOCK PURSUANT TO MERGER OR
CONSOLIDATION
B. TRANSFER OF STOCK RESULTING TO CORPORATE
CONTROL
 02 Persons not liable to the 15%
capital gains tax
1 . Dealers in securities (Regular Income Tax)
2.Investors in shares of stocks in a mutual fund company in connection
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, such as:
a. Foreign governments and foreign government-owned and controlled
corporations
b. Qualified employee trsut fund.
 SALE, EXCHANGE, AND OTHER DISPOSITION
02 OF REAL PROPERTY CLASSIFIED AS CAPITAL
ASSET LOCATED IN THE PHILIPPINES (15%)
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. Fair market value, as shown in the schedule of market values of the

Province and City Assessors.

Normally, only land has zonal value but both land and improvements have
fair market value in the Provincial or Assessor's Office.
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
Provincial or of Assessor's fair value.
 SALE, EXCHANGE, AND OTHER DISPOSITION
02 OF REAL PROPERTY CLASSIFIED AS CAPITAL
ASSET LOCATED IN THE PHILIPPINES (15%)

Note that independent appraisal valuation, the fair value commonly used
in financial reporting, is not used in the computation of the capital gains tax

ILLUSTRATION: 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 an assessed value of P2,400,000.

ANSWER: P7,000,000 x 6%= P420,000

 SALE, EXCHANGE, AND OTHER DISPOSITION
02 OF REAL PROPERTY CLASSIFIED AS CAPITAL
ASSET LOCATED IN THE PHILIPPINES (15%)
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 Assessed value
Lot P 4,000,000 P3,500,000 P 800,000
House n/a 2,000,000 1,200,000

Selling price P 5,000,000

ANSWER: P 6,000,000 x 6%= P360,000

 SALE, EXCHANGE, AND OTHER DISPOSITION
02 OF REAL PROPERTY CLASSIFIED AS CAPITAL
ASSET LOCATED IN THE PHILIPPINES (15%)
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 fair value of P1,800,000 at the date of sale.

ANSWER: Subject to RIT.

 SALE, EXCHANGE, AND OTHER DISPOSITION
02 OF REAL PROPERTY CLASSIFIED AS CAPITAL
ASSET LOCATED IN THE PHILIPPINES (15%)
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)

The certificate for purposes of this legal requirement is referred to as the

"Certificate Authorizing Registration (CAR)".

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.
 SALE, EXCHANGE, AND OTHER DISPOSITION
02 OF REAL PROPERTY CLASSIFIED AS CAPITAL
ASSET LOCATED IN THE PHILIPPINES (15%)
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 applies to conditional sales and pacto de retro sales
by judicial order, and other forms of forced disposition. It also applies
to conditional sales and pacto de retro sales.

c. Final tax
The capital gains tax shall be withheld by the buyer against the seller
and remit the same to the government.
 Taxpayers

Location of the Property

Individual Corporation

Within the Philippines All individuals Domestic Corporation Only

Outside the Philippines

Not applicable Not applicable
 SALE, EXCHANGE, AND OTHER DISPOSITION
02 OF REAL PROPERTY CLASSIFIED AS CAPITAL
ASSET LOCATED IN THE PHILIPPINES (15%)
The 6% capital gains tax is applicable to all individual taxpayers but it
applies only 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.

The sale of real property located abroad is not subject to capital gains tax
since withholding of the capital tax cannot be imposed abroad due to
territorial consideration. Hence, the actual gains realized 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
02
1. Alternative taxation rule
2. Exemption rules
a. Exemption under the NIRC
b. Exemption under special laws

1. ALTERNATIVE TAXATIONS
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
 EXCEPTIONS TO THE 6% CAPITAL GAINS TAX
02
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.

Answer: Gretchen may opt to be subject to tax at 6% of P800,000

(CGT) or report the P600,000 (P800,000-P200,000) 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.
 EXCEPTIONS TO THE 6% CAPITAL GAINS TAX
02
2. 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 latest tax declaration.
 EXCEPTIONS TO THE 6% CAPITAL GAINS TAX
02
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 reacquisition of the new 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.
It must be emphasized that the sale of principal residence must precede the
acquisition of the new principal residence to be exempt. (BIR Ruling No.
038-2015)
 EXCEPTIONS TO THE 6% CAPITAL GAINS TAX
02
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.

2. 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.
 EXCEPTIONS TO THE 6% CAPITAL GAINS TAX
02
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.
 PAYMENT OF THE 6% CAPITAL GAINS TAX IN
02 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.

Deadline for payment of the capital gains 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 of every installment.
 DOCUMENTARY STAMP TAX ON THE SALE OF
02 CAPITAL ASSETS

1. 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.

ANSWER: P 6,000
 DOCUMENTARY STAMP TAX ON THE SALE OF
02 CAPITAL ASSETS

2. 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.

ANSWER: P 75,000
THANK YOU!
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