LESSON 8
CAPITAL GAINS TAXATION
DEALINGS IN PROPERTY – refers to the disposal through sale or exchange of:
a. ordinary assets, or
b. capital assets
Ordinary assets under Sec. 39 (A) of the NIRC are as follows:
1. Stock in trade intended for sale in the normal course of business such as:
a. merchandise inventory (Finished Goods, Work In Process and Raw Materials), or
b. securities held or being sold by dealers in securities.
2. Real properties acquired by real estate dealers or developers;
3. Properties used in business subject to depreciation provided in sec. 34 (F) of NIRC, or
4. Real properties used in trade or business including real property held for rent.
Dealings in ordinary assets are:
1. subject to regular income tax;
2. May result in an ordinary gain or an ordinary loss.
Capital assets
According to Section 39 of the tax code, a capital asset include all property held by the
taxpayer whether or not connected in trade or business but not including those enumerated above
(#1) as ordinary asset.
Hence, the following (but not limited to) are capital assets:

Accounts receivable

Securities held as investment

Stock and securities held by taxpayers other than dealers in securities.

Interest of a partner in a partnership and joint venture

Goodwill

Real or personal properties not used in trade or business like:
o
residential house and lot
o
family vacation house
o
family pleasure yacht
o
car (if partly used for business, only those partly used for personal are capital assets)
o
jewelries, etc.; and
1
o
Personal art collection
Dealings in capital assets:
1. other than domestic stocks and real properties are subject to regular income tax;
2. May result in a capital gain or a capital loss.
ORDINARY GAINS AND LOSSES
Gains and losses from sales or exchanges of ordinary assets are recognized whether the net result of
several transactions is a net ordinary gain or a net ordinary loss:
Selling price
P xxx
Less: Expenses of sale:
xxx Pxxx
Less: Cost
Pxxx
Add: Expenses of acquisition
xxx
Gain or loss on the sale
xxx
xxx
CAPITAL GAINS AND LOSSES
Terminologies:
 Capital gain – gain from the sale, exchange, or other disposition of capital asset
 Capital loss – loss from sale, exchange, or other disposition of capital asset.
 Net capital gain – excess of gains from sale or exchanges of capital assets over losses from
such or exchanges.
 Net capital loss - – excess of losses from sale or exchanges of capital assets over the gains
from such or exchanges.
 Ordinary gain – gains realized from the sale or exchanges of ordinary asset including gains
from performance of services and business.
 Ordinary loss – loss incurred from the sale/exchange of ordinary asset. (It also means the
excess of deductions over the gross income of a taxpayer during a taxable year, or net
operating loss)
Rules:
1. Holding perioda. Corporation – the capital gain or loss shall always be 100% regardless of the length
of the holding period.
b. Individual – the capital gain or loss shall be considered or realized at:
100% - if the asset was held for not more than 12 months (short term CG/L).
50% - if the asset was held for more than 12 months (long term CG/L)
2. Deductibility of capital losses
a. Corporation – capital losses are deductible only to the extent of capital gains
2
b. Individual – capital losses are deductible only to the extent of capital gains
3. Net capital loss carry-over (NCLCO)a. Corporation – NCLCO –is not available
b. Individual – NCLCO – is available
Illustrations:
Case A (Holding period-Individual Taxpayer)
An individual taxpayer, single, has the following data for 2024 taxable year:
Ordinary income
P240,000
Ordinary loss
40,000
Capital gain on capital asset held for 6 months
10,000
Capital gain on capital asset held for 3 years
40,000
Capital loss on capital asset held for 15 months
10,000
Question: How much is the net taxable income:
Answer: P225,000 computed as follows:
Ordinary income
P240,000
Ordinary loss
( 40,000)
Net capital gain:
Capital gain on capital asset held for 6 months (100%)
10,000
Capital gain on capital asset held for 3 years (50% x P40,000)
20,000
Capital loss on capital asset held for 15 months (50% x P10,000) ( 5,000)
25,000
Taxable income
P225,000
Case B (Holding Period-Corporate Taxpayer)
Assume the same data in Case A, except that the taxpayer is a corporation. Determine the taxable
income of the corporation.
Answer: P240,000 computed as follows:
Ordinary income
P240,000
Ordinary loss
( 40,000)
Net capital gain:
Capital gain on capital asset held for 6 months (100%)
10,000
Capital gain on capital asset held for 3 years (100% x P40,000)
40,000
Capital loss on capital asset held for 15 months (100% x P10,000) (10,000) 40,000
Taxable income
P240,000
Case C (Holding period and Net Capital “Loss”-Individual Taxpayer)
An individual taxpayer, single, has the following data for 2024 taxable year:
Ordinary income
P240,000
Ordinary loss
40,000
Capital gain on capital asset held for 6 months
10,000
3
Capital gain on capital asset held for 3 years
Capital loss on capital asset held for 15 months
40,000
80,000
Question: How much is the net taxable income?
Answer: P200,000 computed as follows:
Ordinary income
P240,000
Ordinary loss
( 40,000)
Net capital gain:
Capital gain on capital asset held for 6 months (100%)
10,000
Capital gain on capital asset held for 3 years (50% x P40,000)
20,000
Capital loss on capital asset held for 15 months (50% x P80,000) (40,000)
-__
Taxable income
P200,000
*Capital loss is deducted only to the extent of capital gains.
Case D (Net Capital “Loss”-Carry Over -Individual Taxpayer)
Given the following data during the calendar year (2020), determine the taxable income assuming the
taxpayer is a citizen of the Philippines without a dependent child:
Business income
Business expenses
Compensation income
Capital gain on sale of bonds held for twenty (20) months
Capital gain on direct sale to a buyer of shares of domestic
Corporation held for six (6) months
Capital loss on sale of a car for ten (10) months
Capital loss on sale of land in the Philippines held for two (2) years
Capital loss in 2011 (net taxable income in 2011 was P100,000)
Answer: P800,000 computed as follows:
Business income
Business expenses
Compensation income
Net capital gain:
Capital gain on sale of bonds (50% x P60,000)
Capital loss on sale of a car (100%)
Net capital loss carry-over
Taxable income
P800,000
500,000
500,000
60,000
150,000
50,000
100,000
200,000
P800,000
( 500,000)
500,000
P 30,000
50,000
P800,000
4

Net capital loss carry-over of a previous year is deductible only to the extent of net
capital gain in the succeeding year. In addition, the NCLCO should not be more than
the taxable income of the previous year when the net capital loss was incurred. In the
problem provided, the taxpayer cannot avail of NCLCO because capital loss was
higher than capital gain during the current year.
Case E (Net Capital “Loss”-Carry Over -Individual Taxpayer)
Given the following data during the calendar year (2024), determine the taxable income assuming the
taxpayer is a citizen of the Philippines without a dependent child:
Business income
P800,000
Business expenses
500,000
Compensation income
500,000
Capital gain on sale of bonds held for twenty years (2) months
60,000
Capital gain on direct sale to a buyer of shares of domestic
corporation held for six (6) months
150,000
Capital loss on sale of a car for two (2) years
10,000
Capital loss on sale of land in the Philippines held for two (2) years
100,000
Capital loss in 2023 (net taxable income in 2023 was P50,000)
200,000
Answer: P805,000 computed as follows:
Business income
Business expenses
Compensation income
Net capital gain:
Capital gain on sale of bonds (100% x P60,000)
Capital loss on sale of a car (50% x P10,000)
Net capital gain
Net capital loss carry-over
Taxable income


P800,000
( 500,000)
500,000
P 60,000
( 5,000)
55,000
( 50,000)
5,000
P805,000
The NCLCO should not be more than the net income at the time the capital loss was
incurred.
The remaining P150,000 (P200,000 – P50,000) net capital loss incurred in 2023 is
no longer allowed as a net capital loss carry over after 2024.
Case F (Taxpayer – Domestic Corporation)
Given the following data during the calendar year (2024), determine the taxable income assuming
the taxpayer is a “domestic corporation.”
Business income
P800,000
5
Business expenses
Capital gain on sale of bonds held for two (2) months
Capital gain on direct sale to a buyer of shares of domestic
corporation held for six (6) months
Capital loss on sale of a car for two (2) years
Capital loss on sale of land in the Philippines held for two (2) years
Capital loss in 2017 (net taxable income in 2017 was P50,000)
Answer: P360,000 computed as follows:
Business income
Business expenses
Net capital gain:
Capital gain on sale of bonds (100% x P70,000)
Capital loss on sale of a car (100% x P10,000)
Net capital gain
Net capital loss carry-over
Taxable income

500,000
70,000
150,000
10,000
100,000
200,000
P800,000
( 500,000)
P 70,000
( 10,000)
60,000
( 50,000)
60,000
P360,000
Rules on holding periods and capital loss carry-over are not applicable to corporate
taxpayers.
STOCK TRANSACTIONS
These transactions refer to the sale of equity securities of other corporations which are classified as
either capital assets or ordinary assets. For purposes of stock transaction, the following rules shall
be observed:
CAPITAL GAINS SUBJECT TO PERCENTAGE TAX
Beginning January 1, 2018, a “Percentage Tax” of 6/10 of 1% of the gross selling price or gross
value in money or shares of stock sold, bartered, or exchanged through the local stock exchange
(Listed Shares) also known as Stock Transaction Tax. The following sellers or transferors of stock
are liable to this tax:
a. Individual taxpayer, whether citizen or alien (dealer or not dealer in securities)
b. Corporate taxpayer, whether domestic or foreign,
c. Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust funds, and
pension funds, among others.
6
CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX
1. Capital Gains Tax on sale of real properties held as capital asset situated in the Philippines
computed at a rate of 6% of the highest amount among the selling price, FMV and Zonal
value. (This will be discussed in Module 7 – Tax on Individual Taxpayers)
2. Capital Gains Tax on sale of shares of stock of a domestic corporation sold directly to a
buyer (NOT DISPOSED OF THROUGH THE STOCK EXCHANGE) computed a tax rate
of:
Prior to January 1, 2018
5% On the 1st P100,000 capital gains
10% On capital gains in excess of P100,000
Beginning January 1, 2018 or upon the effectivity of TRAIN Law:
Tax% - 15% Basis - Capital gains
Summary Application:
Sale of Shares of Stocks
YES
Inventory
Not Traded in stock Exchange:
15% of the net capital gain.
ARE STOCKS HELD
BY DEALERS IN
SECURITIES?
NO
Subject to Normal Tax
based on Taxable Income
(After Business Expenses) plus Business Tax
The return shall be filed within 30 days after each
transaction and the final consolidated return of all
transactions during the taxable year shall be filed
on or before the 15th day of the fourth (4th) month
following the close of the taxable year.
Capital Asset
Traded in Stock Exchange:
6/10 of 1% of the gross selling price
or gross value in money
Return and payment of tax:
Primary Offering – 30 days from date of listing in
the LSE
Secondary Offering – 5 banking days from date of
collection.
7
In a primary investment offering, investors are purchasing shares (stocks) directly from the issuer.
However, in a secondary investment offering, investors are purchasing shares (stocks) from sources
other than the issuer (employees, former employees, or investors).
Illustration:
George sold 2,000 shares of a domestic corporation in a local stock exchange at 110 per share
(Acquisition cost – P100 per share)
Question #1 – How much is the capital gains tax on the sale of shares?
Answer: P 0 . The transaction is exempt from capital gains tax.
Question #2 – How much is the income subject to basic or ordinary tax?
Answer: P 0 (because he is not a dealer in securities)
Question #3 – What is the applicable tax on the transaction?
Answer: Percentage tax of P1,100 computed as follows:
Selling price (2,000 sh. x P110)
x Percentage tax rate
Percentage/Stock Transaction tax
P220,000
.006
P 1,320
Question #4 – Assume that George is a dealer in securities, determine the applicable taxes and
the amount of tax due.
Answer: The transaction is subject to: Basic Income Tax based on the gain or loss on sale and
VAT (Business Tax) computed as follows:

Selling price (2,000 shares x P110)
Less: Cost (2,000 shares x P100)
Gross income subject to basic tax
P220,000
200,000
P 20,000
Selling price (2,000 shares x P110)
Less: Cost (2,000 shares x P100)
Gross income
x VAT rate
Output VAT (Business Tax)
P220,000
200,000
P 20,000
12%
P 2,400
VAT is not an income tax. It is a business tax like percentage tax.
Illustration:
On November 1, Dolly Ann sold her shares of stock in a domestic corporation for
P650,000 directly to a buyer. The shares are recorded in its books at a cost of P525.000 the
buyer agreed to pay in P100,000 monthly installments starting November 30.
8
Required: Compute the following:
1. Final tax on the sale if the stocks are not listed and traded in the stock exchange
2. The tax on the sale if the shares are listed and traded in the stock exchange.
Answer:
1. Shares are not listed and traded in the stock exchange:
If on November 1, Mr. Batanes made a sale of domestic stocks costing P525,000 directly
to a buyer for P650,000 The CGT shall be:
Selling price
Cost
Net capital gain
Rate of tax
Capital gains tax
P650,000
525,000
P125,000
15%
P 18,750
Can the CGT be paid on installment? Yes, under the following conditions:
a. Selling price exceeds P1,000; and
b. if the initial payment does not exceed 25% of the selling price.
Initial payment:
First installment -November 30
P100,000
Ratio of initial payment = (100,000/650,000) = 15%, hence the taxpayer is
qualified to pay CGT by installment
The CGT to be paid in installment is (P100,000/650,000 x P18,750) P2,884.60
2. If the shares of stocks are listed and traded in the stock exchange, the sale is not subject
to income tax. However, it shall be subject to Other Percentage Tax (Stock Transaction
Tax) at a rate of 6/10 of 1% of the gross selling price or gross value in money. Thus the
tax shall be:
Selling price
P650,000
Rate of tax
.006
Percentage tax (Stock Transaction Tax) P 3,900
Summary:
Gains on dealings in capital assets
Gain on sale, exchange, and other disposition of domestic stocks
directly to buyer
Tax Rates
15% capital gains tax (CGT)
(based on net)
(if through PSE – it is subject to Stock transaction tax of 60% of 1% of the
9
Selling Price effective Jan. 1, 2018)
Sale, exchange, and other disposition of real property in the
Philippines
Gains from other capital assets
6% capital gains tax
Regular income tax
Disposition of Principal Residence
The sale, exchange and other disposition of a principal residence for the reacquisition of a new
principal residence by individual taxpayers is exempt from, the 6% CGT if the following requisites
are present:
a. The seller must be a citizen or resident alien.
b. The sale involves the principal residence of the seller-taxpayer
c. The proceeds of the sale is utilized in acquiring a new principal residence.
d. 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.
e. The reacquisition of the new residence must be within 18 months from the date of sale.
f. The capital gain is held in escrow in favor of the government.
g. The exemption can only be availed of once in every 10 years.
h. The historical cost or adjusted basis of the principal residence sold shall be carried over to the
new principal residence built or acquired.
Illustration #1Gamboa sold her principal residence with a FMV of P6,000,000 for P5,000,000. Gamboa purchased
the residence for P3,000,000 several years ago. The imposable capital gains tax is 6% of P6,000,000
or P360,000.
Gamboa should indicate her intention to apply for exemption in the CGT return to be filed and submit a Sworn
Declaration of Intent. She will be required to deposit the P360,000 CGT in an escrow account in favor of the
government.
Assuming Gamboa acquires a new principal residence for P5,200,000 within 18 months, the
P360,000 CGT in escrow will be released to her.
If Gamboa does not acquire a new principal residence within 18 months, the CGT 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.
10
Thus,
Basis of old residence
P3,000,000
Add: Additional out-of-pocket costs (P5.2M – P5M)
200,000
Basis of new residence
P3,200,000
Partial utilization of proceeds is partially exempt
Assume Gamboa 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 Gamboa
(4.5M/P5M x P360,000)
P324,000
To the government (P.5M /P5M x P360,000)
36,000
Total amount in escrow
P360,000
Tax basis of old residence x utilized proceeds/total proceed
P3,000,000 x P4,500,000/P5,000,000
P2,700,000
Illustration #2
Fakundo sold his residential lot with a FMV of P1,000,000 for P2,000,000. He purchased a new
residence for P1,600,000 within 18 months.
Question: Is Fakundo exempt from 6% CGT?
Illustration #3Afraid of ghosts that frequently appear in his mansion residence, Moonday ledft his mansiuon and
bought a new home for P17,000,000 as his principal residence. Within 3 months, Moonday was able
to sell his mansion for P40,000,000.
Question: Is Moonday exempt from CGT?
Illustration #4
On December 1, 2024, Ms. Batangas sold for P4,000,00 an unused lot with a cost and FV of
P2,000,000 and P5,000,000, respectively. The buyer agreed to pay P500,000 monthly installments
starting December 31, 2024.
Question:
a. How much is the CGT? –Answer: P300,000
b. Can Ms. Batangas pay his CGT in installment? Yes. If so, how much? P37,500
Illustration #5- (with mortgage not in excess of cost)
Assume that the lot in the previous illustration is mortgaged for P1,000,000 which the buyer assumed
and the buyer agreed to pay the P3,000,000 balance in P300,000 monthly installments starting
December 31, 2024.
CGT (P5M x 6%)
P300,000
11
Initial payment (December installment)
Ratio of initial payment (P300,000/P4,000,000)
300,000
7.5%
The contract price shall be computed as follows:
Selling price
Less: Mortgage assumed by buyer
Contract price
P4,000,000
1,000,000
P3,000,000
The CGT is payable every installment is (P300,000/P3,000,000 x P300,000) P30,000
Illustration #6- (with mortgage in excess of cost)
Assume further that the lot is mortgaged for P2,500,000 which the buyer assumed and the buyer
agreed to pay the P1,500,000 balance in P300,000 monthly installments starting December 31, 2024.
The excess of the mortgage over the tax basis of the property is an indirect downpayment which
must be included in the initial payment and contract price.
The CGT is (P5M x 6%)
P300,000
The contract price shall be computed as follows:
Selling price
Less: Mortgage assumed by buyer
Cash collectible
Add: Constructive downpayment – excess mortgage
(P2.5M – P2.0M cost)
Contract price
The initial payment shall be computed as follows:
Constructive downpayment (excess mortgage)
December 31 installment
Initial payment
Ratio of downpayment (P800,000/P4,000,000)
P4,000,000
2,500,000
P1,500,000
500,000
P2,000,000
P 500,000
300,000
P 800,000
20%
The CGT can therefore be paid in installments as follows:
For the sale:
(P500,000/P2,000,000 x P300,000)
P 75,000
For every installment: (P300,000/P2,000,000 x P300,000)
45,000
Illustration #7- Initial payment exceeds 25% of the selling price
12
If the IP exceeds the selling price, the sale would be taxed as if it were a cash sale, hence payment of
tax should be lump sum upon filing of the CGT return without regard to whether or not any
mortgage on the property exceeds the cost of the property disposed.
DEADLINE OF PAYMENT OF CGT –
a. within 30 days from the date of sale or exchange
b. for foreclosure sale, within 30 days from the expiration of the applicable statutory
redemption period.
c. if on installment payment, within 30 days upon receipt of every installment.
Documentary stamp on the sale of capital assets
a. Shares of stocks
- P1.50 for every P200 of the par value of the stocks sold.
A taxpayer sold stocks with total par value of P800,000 for P1,200,000. The stocks have
a FV of P1,250,000 and were acquired for P1,000,000.
The documentary stamp tax is = (1.50 x P200/P800,000)
b. Sale of real properties
P6,000
-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.
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 is = (P15 x P5,000,000 / P1,000)
P75,000
.https://www.lamudi.com.ph/journal/qa-what-is-capital-gains-tax-who-pays-for-it/
Income Taxation – Edwin Valencia
Income Taxation – Omar Ampongan
Income Taxation – Enrico Tabag
Income Taxation – Rex Banggawan
13