Module 6

TAXATION
CAPITAL GAINS TAXATION
The assets of the business are classified as:
1. Ordinary assets – includes:
a. stock in trade of the taxpayer, or other property of a kind which would properly be included in
an inventory of the taxpayer if on hand at the end of the taxable year
b. properties held by the taxpayer primarily for sale to customers in the ordinary course of trade or
business;
c. properties used in trade or business of a character which is subject to allowance for
depreciation; and
d. real properties used in trade or business
Examples: inventories, property, plant and equipment
2. Capital assets – any other assets that does not fall under the definition of ordinary assets
Examples: investment properties, notes receivables and investment in equity or debt securities (for
a non-security dealer taxpayer)
Gains arising from sale of ordinary assets are called “ordinary gains.” Gains arising from sale of capital
assets are called “capital gains.” All ordinary gains are taxable under regular income taxation. Capital
gains are taxable either under final tax or under regular income tax.

CAPITAL GAINS SUBJECT TO FINAL TAX

A. Capital gains tax on sale, barter, exchange and other disposition of domestic shares of
stock directly to buyer
Requisites:
a. There is a net gain.
b. The capital asset sold is a domestic stock.
c. The sale is made directly to buyer.
Capital Gains Tax Rates: 15%
Note to students: This rule on capital gains on sale of domestic stocks directly to buyer is uniform
to all income taxpayers (individuals or corporate) regardless of classification.
The rule does not apply to:
1. Gains on sale of shares of stock which is traded in the Philippine Stock Exchange (PSE)
 This is subject to a transaction tax (percentage tax) of ½ of 1% of selling price. Old law
 New Law: 60% of 1% of the SP eff. 1/1/2018
2. Gains under similar conditions by security brokers or dealers
When to file the Capital Gains Tax Returns?
1. Per transaction basis: Within 30 days after each transactions
2. Annual basis:
a. For individuals – On or before April 15 of the following year
b. For corporations – On or before the 15 th day of the fourth month following the close of the
taxable year
When to pay the capital gains tax?
1. Lump sum – Upon date of filing the return with the Bureau (within 30 days from date of sale)
2. Installment – tax on installments is due within 30 days from receipts of each installments
Documentary Stamp Tax
 Par value stock: P1.50/P200 or fractional part of the par value of due bill, certificate of
obligation or stock
 No-par stock: 25% of the documentary stamp tax paid on the original issue of said stock. (The
documentary stock on original issue of non-par stock is based on actual consideration for the
issuance – Sec. 174 NIRC)
 Limit: Only one tax shall be collected on each sale or transfer of stock or securities from one
person to another regardless of whether or not a certificate of stock is issued or obligation is
issued, indorsed, or delivered in pursuance of such sale or transfer.
 Deadline: Documentary stamp tax return shall be filed within 10 days after the close of the
month when the taxable document was made, signed, issued, accepted or transferred, and the
tax thereon shall be paid at the same time the return is paid.
B. Sale, exchange or other disposition of real property in the Philippines classified as capital
asset
Requisites:
a. The real property is located in the Philippines.
b. The property is classified as capital asset.
 c. The taxpayer is an individual or a domestic corporation.
d. The taxpayer is other than a foreign corporation.
Tax Rate and Tax Basis: 6% x (the higher of Gross Selling Price or Fair Market Value)
The fair market value for purposes of the capital gains tax is whichever is higher of:
1. Zonal value as prescribed by the Commissioner of Internal Revenue
2. Assessed value as determined by the Provincial or City Assessor’s Office
Gross selling price – The amount of any money received plus the fair market value of any property
received. Interest on the selling price shall be treated separately as Other Income taxable under
regular income taxation.
Excess Mortgage Assumed
The excess of the mortgage assumed over the cost of the property is included both in initial payment
and selling since it is a constructive receipt of income; in other words, it represents “extra
consideration”.
Note to students: The basis of the tax is on the gross selling price or gross fair market value. This
treatment presumes the existence of gain and is applied regardless of the existence of actual gain.
SCOPE OF THE 6% CAPITAL GAINS TAX:
Individuals Corporation
Citizen Alien
Location of Non- NR- NR- Domesti Reside Non-
Real Reside Reside Reside ETB NETB c nt resident
Property nt nt nt
Philippines       Not Applicable
Abroad × × × × × × × ×
Note to students: Regular income taxation, being the general rule, applies where the 6% final capital
gains tax do not apply. Under regular taxation, the actual net gain is subject to regular income tax.
How is the capital gains tax paid?
1. The tax is withheld at source – the seller and buyer files a joint capital gains tax return (one return
per sale or foreclosure sale).
2. Installment (one return for each installment payment receive)
The tax is withheld at source in installments when the taxpayer qualifies and opted to be taxed on
installments.
Alternative Taxation:
The actual net gain on the sale of real property may be included under progressive income taxation.
Requisites:
a. the seller is an individual
b. the buyer is the government, its political subdivisions or agencies or GOCCs
Tax Exemption:
The sale may be exempted from the payment of capital gains tax provided the following conditions are
met:
1. The seller is an individual citizen or resident alien.
2. The real property sold is his principal residence.
Principal Residence – the place where an individual person resides comprising of the house and
the lot to where it erects; in case the interest on the land component is held by other persons, only
the dwelling house is considered principal residence.
The residential address indicated in the latest income tax return immediately before the date of sale
is conclusive presumed to be the true residence. The Barangay Captain Certification or Building
Administrator Certification in the case of condominium residences is no longer honored.
3. The full proceed of the sale is utilized in acquiring another residence.
4. A new residence must be acquired or constructed within 18 calendar months from the date of sale.
5. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption within 30 days
from the date of sale through a prescribed return.
6. The capital gains tax thereon is held in escrow in favor of the government.
7. The exemption can only be availed once every 10 years.
8. The historical cost or adjusted basis of the real property (principal residence) sold shall be carried
over to the new principal residence built or acquired
Should there be any portion of the proceeds of sale not utilized for the reconstruction of a new
residence, the same shall be taxable. The tax on the unutilized portion shall be determined as
follows:
 Gross selling price or Fair Unutilized portion
Market Value at the date of x x 6%
sale, whichever is higher Gross selling price

Tax Basis of New Principal Residence:

Tax Basis refers to the cost or adjusted cost of a property for tax purposes and hence the amount
deductible for tax purposes in determining gain or losses in disposal of the related property if the
related transaction is taxable under the progressive system of taxation. Generally, when a property is
acquired by purchase, the cost is the tax basis.
A tax basis reduction may result if the proceeds of the disposition of a principal residence is not fully
utilized in the acquisition or construction of a replacement. Likewise a tax basis increase results when
additional expenditures were incurred by the taxpayer in securing a replacement principal residence.
Less than full utilization of proceeds:
Utilized Selling
New cost basis = x Basis of the old principal
Gross Selling Price residence

More than full utilization of proceeds:

Basis of the old principal Additional expenditure in

New cost basis = + excess of the proceeds
residence
Documentary Stamp Tax
 Amount:
 P15 – if selling price after allowance for encumbrances does not exceed P1,000
 P15 – for each P1,000 or fractional excess above P1,000 of such selling price
 Deadline: Documentary stamp tax return shall be filed and the tax thereon paid within 10 days after
the close of the month when the taxable document was made, signed, issued, accepted or
transferred.

Sample Problem:

1. Oliver, a resident citizen, has the following transactions of not listed and traded shares of stocks of a
domestic corporation:
Date of Sale Date of Acquisition Cost Selling Price
January 3, 2013 April 8, 2012 85,000 185,000
March 15, 2013 Sept. 30, 2011 256,000 360,000
August 12, 2013 Sept. 23, 2011 175,000 115,000
Nov. 23, 2013 August 7, 2011 144,500 150,000

Required: 1. Capital gains tax per date of sale

2. Final Capital Gains Tax/refund at the end of the year

2. Mr. Cal Vho, resident citizen, married sold shares of stocks as follows:
a. Sales Price 194,000
Sales Expenses 2,000
Acquisition Cost 122,000
Acquisition Expense 3,000

b. Sales Price 135,000

Acquisition Cost 142,000
Acquisition Expense 2,000
Compute for the capital gains tax on each individual sale.

3. On July 1, 2013, Ms. Cory Pot sold an 800-square meter commercial lot for P5,000,000, which was
acquired for P1,800,000 in 2008. On the date of sale, the property had a fair market value of
P4,800,000 and the zonal value is P6,500 per square meter. How much is the capital gains tax?

SP 5,000,000 FMV 4,800,000 AV

AC 1,800,000 ZV 5,200,000
CGT = 5,200,000 X 6% = 312,000