Q: Distinguish "capital asset" from "ordinary asset".

A: The term capital asset is defined by an exclusion of all ordinary assets. Thus, those
properties not specifically excluded in the statutory definition constitutes capital
assets, the profits or losses on the sale or the exchange of which are treated as capital
gains or capital losses. Conversely, all those properties specifically excluded are
considered as ordinary assets and the profits or losses realized must have to be
treated as ordinary gains or ordinary losses.

Accordingly, "Capital assets" includes property held by the taxpayer whether or not
connected with his trade or business, but the term does not include any of the
following, which are consequently considered as "ordinary assets": [SOUR]

1. Stock in trade of the taxpayer or other 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
2. Property held by the taxpayer primarily for sale to customers in the Ordinary
course of trade or business
3. Property Used in the trade or business of a character which is subject to the
allowance for depreciation provided in the NIRC
4. Real property used in trade or business of the taxpayer

The statutory definition of "capital assets" practically excludes from its scope, all
property held by the taxpayer if used in connection with his trade or business.

Q: What are examples of capital asset?

A:
1. Jewelries not used for trade or business
2. Residential houses and lands owned and used as such
3. Automobiles not used in trade or business
4. Stock and securities held by taxpayers other than dealers in securities

Q: What are examples of ordinary assets?

A:
1. The condominium building owned by a realty company, the units of which are for
rent or for sale
2. Machinery and equipment of a manufacturing concern subject to depreciation
3. The motor vehicles of a person engaged in transportation business

Q: May capital asset be reclassified as ordinary asset?

A: Yes, property initially classified as capital asset may thereafter be treated as an

ordinary asset if a combination of the factors indubitably tends to show that the
activity was in furtherance of or in the course of the taxpayers trade or business.

Note: Properties classified as ordinary assets for being used in business other than
real estate business are automatically converted into capital assets upon showing that
the same have been used in business for more than two years prior to the
consummation of the taxable transactions involving said properties.
Q: Distinguish ordinary gain from capital gain.
A: Ordinary gain is a gain derived from the sale or exchange of ordinary assets such as
SOUR while Capital gain is a gain derived from the sale or exchange of capital assets
or property not connected with the trade or business of the taxpayer other than SOUR.

Q: Distinguish Actual Gain from Presumed Gain?

A: Actual Gain excess of the cost from a sale of asset.
Presumed Gain presumption of law that the seller realized gains, which is taxed at
6% of the selling price or fair market value, whichever is higher.

Q: Distinguish ordinary income from ordinary loss?

A: Ordinary Income includes the gain derived from the sale or exchange of ordinary
asset while Ordinary Loss is the loss that may be sustained from the sale or exchange
of ordinary asset.

Q: Differentiate capital gain from capital loss.

A: Capital Gain includes the gain derived from the sale or exchange of an asset not
connected with the trade or business. Capital Loss is the loss that may be sustained
from the sale or exchange of an asset not connected with the trade or business.
Capital loss may not exceed capital gains when used as a deduction to income.

Q: What are the kinds of capital gain under the provisions of the NIRC?
A:

1. Capital Gains Subject to Final Tax - usually imposed upon the sale, exchange or
other disposition of:
a. Real property
b. Shares of stock that are not traded through the stock exchange

2. Capital Gains Included in Gross Income for Income Tax Purposes - includes sale and
other disposition of capital assets other than those enumerated above. The gain is
included in the gross income of the taxpayer.

Q: Distinguish capital gains subject to final tax from capital gains reported in the
income tax return.

A: SUBJECT TO REPORTED IN
FINAL TAX THE ITR
As to deductions
There is a fixed rate for the tax The capital gains are aggregated with
other income to constitute gross income
subject to deductions

As to actual gains
GR: It does not matter whether or not There must be actual capital gains earned
capital gains are actually earned
(presumed gains)
XPN:Disposition of shares not traded
in the stock exchange or thru initial
public offering

As to holding period
GR: Holding period is immaterial Holding period is considered.
XPN:Disposition of shares not traded
in the stock exchange or thru initial
public offering
As to Net Loss Carry Over
Not allowed. Could be availed.

Q: What is the treatment of capital gains and losses?

A:
1. From Sale of Stocks of Corporations
a. Stocks Traded in the Stock Exchange subject to stock transaction tax of of 1%
on its gross selling price
b. Stocks Not Traded in the Stock Exchange subject to capital gains tax

2. From Sale of Real Properties in the Philippines capital gain derived is subject to
capital gains tax but no loss is recognized because gain is presumed.

3. From Sale of Other Capital Assets - the rules on capital gains and losses apply in the
determination of the amount to be included in gross income and not subject to capital
gains tax.

Sale or Other Disposition of Real Property

Q: Explain the tax treatment of sale or disposition of real property treated as

capital asset.
A: A final tax of 6% shall be imposed based on the higher amount between:
1. The gross selling price; or

2. Whichever is higher between the current fair market value as determined by:
a. Zonal Value prescribed zonal value of real properties as determined by the CIR; or
b. Assessed Value the fair market value as shown in the schedule of values of the
Provincial and City assessors (Sec. 24 D [1], NIRC)

Note: Actual gain or loss is immaterial since there is a conclusive presumption of gain.

Q: How is the tax treatment of disposition of real property deemed capital asset
as to taxpayers liable therefrom?
A: For individuals and corporations The capital gains presumed to have been realized
from the sale, exchange or other disposition of real property located in the Philippines
classified as capital assets. (Sec. 24 D [1], 27 D [5], NIRC)

Note: As regards transactions affected by the 6% capital gain tax, the NIRC speaks of
real property with respect to individual taxpayers, estate and trust but only speaks of
land and building with respect to domestic and resident foreign corporation.
Q: What is the coverage of capital gains and losses in real estate property?
A: It involves the sale or other disposition of real property classified as capital asset
located in the Philippines by a non-dealer in real estate.

Q: What is the tax treatment if property is not located in the Philippines?

A: Gains realized from the sale, exchange or other disposition of real property, not
located in the Philippines by resident citizens or domestic corporations shall be
subject to ordinary income taxation (Sec. 4.f, RR 7-2003) but subject to foreign tax
credits.

Such income may be exempt in case of non-resident citizens, alien individuals and
foreign corporations. (Sec. 4.f, RR 7-2003)

Q: What transactions are covered by the presumed capital gains tax on real
property?
A: It covers:
1. Sale;
2. Exchange; or
3. Other disposition, including pacto de retro and other forms of conditional sales.
(Sec. 24 D [1], NIRC)

Note: Sale, exchange or other disposition includes taking by the government

through expropriation proceedings.

Q: Is the sale of principal residence by an individual subject to capital gain tax?

A: No, sale of principal residence by an individual is exempt provided the following
requisites are present:
1. Sale or disposition of the old actual principal residence;
2. By a citizen or resident alien;
3. Proceeds from which is utilized in acquiring or constructing a new principal
residence within 18 calendar months from the date of sale or disposition;
4. Notify the CIR within 30 days from the date of sale or disposition through a
prescribed return of his intention to avail the tax exemption;
5. Can be availed of once every 10 years;
6. The historical cost or adjusted basis of his old principal residence shall be carried
over to the cost basis of his new principal residence;
7. If there is no full utilization, the portion of the gains presumed to have been
realized shall be subject to capital gains tax; and
8. The 6% capital gains tax due shall be deposited with an authorized agent bank
subject to release upon certification by the RDO that the proceeds of the sale have
been utilized. (RR No. 14-00)

Q: What is a principal residence?

A: It refers to the dwelling house, including the land on which it is situated, where the
individual and members of his family reside, and whenever absent, the said individual
intends to return. Actual occupancy is not considered interrupted or abandoned by
reason of temporary absence due to travel or studies or work abroad or such other
similar circumstances. (RR No. 14-00)
Note: The address shown in the ITR is conclusively presumed as the principal
residence. If the taxpayer is not required to file a return, certification from Barangay
Chairman or Building Administrator (for Condominium units) shall suffice.

Q: If the taxpayer constructed a new residence and then sold his old house, is
the transaction subject to capital gains tax?
A: Yes, exemption from capital gains tax does not find application since the law is
clear that the proceeds should be used in acquiring or constructing a new principal
residence. Thus, the old residence should first be sold before acquiring or constructing
the new residence.

Sale of Shares of Stock of Domestic Corporation

Q: What kind of shares of stock is subject to capital gains tax?

A: Only those sales of shares of stock of a domestic corporation which is not listed or
not traded in the stock exchange by a non-dealer in securities.

Q: Who are liable to pay capital gains tax on the sale of shares of stock not
traded in the stock exchange?
A:
1. Individuals both citizens and aliens
2. Corporations both domestic and foreign
3. Estates and Trusts

Q: What is the controlling factor in sale of shares of stock?

A: What is controlling is whether or not the shares of stock are traded in the local
stock exchange and not where the actual sale happened. (Del Rosario v. CIR, CTA Case
No. 4796, Dec. 1, 1994)

Note: If the stock is traded in the stock exchange, it is not subject to capital gain tax
but to stock transaction tax of of 1% on its gross selling price.

Q: What is the effect if the sale is made by a dealer in securities?

A: The resulting gain or loss is considered as ordinary gain subject to graduated rates
(5-32%) for individual and normal corporate income tax (30%) for corporations.

Q: Explain the tax treatment of sale of shares of stock considered as capital

assets which are not traded in the stock exchange.
A: The holding period notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the taxable year from the
sale, barter or exchange or other disposition of shares of stock in a domestic
corporation which are not traded in the stock exchange. (Sec. 24 [C], NIRC)
Not over P100,000 5%
On any amount in excess of P100,000 10%

Q: What is Holding Period?

A: The length of time property is held by the taxpayer and it is from acquisition to
alienation.
Q: What is net capital gain?
A: It is the excess of gains from the sales or exchanges of capital assets over the losses
from such sales or exchanges.

Q: How is selling price determined?

A: The following rules shall apply in determining the selling price:
1. In the case of cash sale - the selling price shall be the total consideration per deed
of sale.
2. If the total consideration is partly in money and in kind - the selling price shall be
the sum of money and the fair market value of the property received.
3. In the case of exchange - the selling price shall be the fair market value of the
property received.
4. In case the fair market value of the shares of stock sold, bartered or exchanged is
greater than the amount of money and/or fair market value - the excess of the fair
market value of the shares of stock SBE over the amount of money and the fair
market value of the property, if any, received as consideration shall be deemed a
gift subject to the donors tax under the NIRC. (RR 6-2008)

Q: What are the important features as regards capital gains from sale of shares of
stock?
A:
1. No capital loss carry-over for capital losses sustained during the year (not listed
and traded in a local stock exchange) shall be allowed but capital losses may be
deducted on the same taxable year only.
2. The entire amount of capital gains and capital loss (not listed and traded in a local
stock exchange) shall be considered without taking into account the holding period
irrespective of the type/kind of taxpayer.
3. Non-deductibility of losses on wash sales and short sales.
4. Gain from sale of shares of stock in a foreign corporation are not subject to
5. capital gains tax but to graduated rates either as capital gain or ordinary income
depending on the nature of the trade of business of the taxpayer.

Q: What is a Short Sale?

A: Any sale of a security which the seller does not own or any sale which is
consummated by the delivery of a security borrowed by, or for the account of the
seller.

Q: When can one be said to own a security?

A: A person shall be deemed the owner of a security if he:
1. Or his agent has title to it
2. Has purchased or entered into an unconditional contract binding on both parties
thereto, to purchase it and has not yet received it
3. Owns a security convertible into or exchangeable for it and has tendered such
security for conversion or exchange
4. Has an option to purchase or acquire it and has exercised such option
5. Has rights or warrant to subscribe to it and has exercised such rights or warrants
provided however, that a person shall be deemed to own securities only to the
extent he has a net long position in such securities.
Q: John, US citizen residing in Makati City, bought shares of stock in a domestic
corporation whose shares are listed and traded in the Philippine Stock Exchange
at the price of P2 Million. A day after, he sold the shares of stock through his
favorite Makati stockbroker at a gain of P200,000.
1. Is John subject to Philippine income tax on the sale of his shares through his
stockbroker? Is he liable for any other tax?
2. If John directly sold the shares to his best friend, a US citizen residing in
Makati, at a gain of 200,000, is he liable for Philippine income tax? If so what is
the tax base and rate?

A:
1. No, the gain on the sale or disposition of shares of sock of a domestic corporation
held as capital assets will not be subjected to income tax if these shares sold are
listed and traded in the stock exchange (Sec. 24 [C], NIRC). However, the seller is
subject to the percentage tax of of 1% of the gross selling price. (Sec. 127 [A],
NIRC).

2. Yes, the sale of shares of stocks of a domestic corporation held as capital, not
through a trading in the local stock exchange, is subject to capital gains tax based
on the net capital gain during the taxable year. The tax rate is 5% for a net capital
gain not exceeding P100,000 and 10% for any excess. The tax due would be
P15,000.

Other Capital Assets

Q: What are other capital assets?

A: These include capital assets other than those:
1. Real property located in the Philippines; and
2. Shares of stock of a domestic corporation which is not listed and not traded in the
stock exchange.

Q: What is the tax treatment of sale or exchange of other capital assets?

A: The gains or losses shall be subject to the holding period, after which the net
capital gain is determined. The net capital gain (excess of the gains from sales or
exchanges of capital assets over the loss from such sales/exchanges) are included in
the gross income of the taxpayer subject to the graduated rates of 5 - 32% for
individuals and the normal corporate income tax of 30% for corporations. (Sec. 24 [D],
NIRC)

Q: What is the significance in determining whether the asset is ordinary asset or

capital asset?
A: They are subject to different rules. There are special rules that apply only to capital
transactions, to wit:
1. Holding period rule
2. Capital and loss limitation
3. Net capital loss carry over (NELCO)

Q: What is the holding period rule?

A: Where the capital asset sold has been held by the taxpayer for more than 12
months, the gain derived therefrom is taxable only to the extent of 50%. Consequently,
if the taxpayer held the capital asset sold for a year or less, the whole gain shall be
taxable. It is a form of tax avoidance since the taxpayer can exploit it in order to
reduce his tax due. (Sec. 39 [B], NIRC)

Q: Who can avail the holding period rule?

A: Only individual taxpayers can avail. It is not allowed to corporations.

Q: What is the Capital and Loss Limitation Rule?

A: Under this rule, capital loss is deductible only to the extent of capital gain.

Q: Capital loss is deductible to the extent of capital gain, what does this mean?
A: This means that you can only deduct capital loss from capital gain. If theres no
capital gain, no deduction is allowed because you cannot deduct capital loss from
ordinary gain.

Q: Can you deduct ordinary loss from ordinary gain and from capital gain?
A: Yes for both cases.

Q: What is the Rule on Matching Cost?

A: Under this rule only ordinary and necessary expense are deductible from gross
income or ordinary Income. Capital loss is a non-business connected expense as it can
be sustained only from capital transactions. To allow that capital loss as a deduction
from ordinary income would run counter to the rule on matching cost against revenue.

Q: What is the treatment of net capital loss carry-over (NELCO)?

A: If any taxpayer, other than a corporation, sustains in any taxable year a net capital
loss, such loss (in an amount not in excess of the net income for such year) shall be
treated in the succeeding taxable year as a loss from the sale or exchange of a capital
asset held for not more than 12 months. (Sec. 39 (D), NIRC)

Q: What are the notable distinctions between NELCO and NOLCO?

A: NET CAPITAL LOSS CARRY OVER NET OPERATING LOSS CARRY OVER
(NELCO) (NOLCO)
As to source
Arises from capital transactions meaning Arises from ordinary transactions
involving capital asset meaning involving ordinary asset
As to who can avail
Can be availed of by individual taxpayer Can be availed of by individual and
only corporate taxpayer

XPN: In NELCO wherein such loss can be carried over in the next succeeding taxable
year.

Q: Distinguish the treatment of capital gains and losses between individuals and
corporations.
A: INDIVIDUAL CORPORATION
Availability of holding period
Holding period available No holding period
Extent of recognition
The percentages of gain or loss to be taken Capital gains and losses are
into account shall be the ff.: recognized to the extent of 100%
1. 100% - if the capital assets have been
held for 12 mos. or less; and
2. 50% - if the capital asset has been held
for more than 12 months

Deductibilty of capital losses

Non-deductibility of Net Capital losses Non-deductibility of Net Capital
Capital losses are allowed only to the extent losses
of the capital gains; hence, the net capital XPN: If any domestic bank or trust
loss is not deductible. company, a substantial part of whose
business is the receipt of deposits,
sells any bond, debenture, note or
certificate or other evidence of
indebtedness issued by any
corporation (including one issued by
a government or political subdivision)
Availability of NELCO
NELCO allowed NELCO Not allowed

Q: What is the rule on the recognition of gain or loss in exchange of property?

A: Upon the sale or exchange of property, the entire amount of the gain or loss shall
be recognized.

Q: What is the exception?

A: No gain, no loss shall be recognized means that if there is a gain it shall not be
subject to tax and if there is a loss it shall not be allowed as a deduction.
Instances where no gain or loss is recognized:
1. A corporation which is a party to a merger or consolidation exchanges property
solely for stock in a corporation which is a party to the merger or consolidation.
2. A shareholder exchanges stock in a corporation which is a party to the merger or
consolidation solely for the stock of a nother corporation, also a party to the merger
or consolidation.
3. A security holder of a corporation which is aparty to the merger or consolidation
exchanges his securities in such corporation solely for stock securities in another
corporation, a party to the merger or consolidation.
4. If property is transferred to a corporation by a person in exchange for stock or unit
of participation in such a corporation, as a result of such exchange said person
gains control of said corporation, provided that stocks issued for services shall not
be considered as issued in return for property.

Q: What is merger or consolidation for purposes of taxation?

A: Merger or consolidation means:
1. Ordinary merger or consolidation, or
2. The acquisition by one corporation of all or substantially all the properties of
another corporation solely for stock provided that:
a. A merger or consolidation must be undertaken for a bona fide business
purpose and not solely for the purpose of escaping the burden of taxation.
 b. In determining whether a bona fide business purpose exists each and every
step of the transaction shall be considered and the whole transaction or
series of
c. transactions shall be treated as a single unit.
d. In determining whether the property transferred constitutes a substantial
portion of the property of the transferor, the term property shall be taken
to include the cash assets of the transferor.

Q: What is control for recognition of gain or loss?

A: It means ownership of stocks in a corporation possessing at least 51% of the total
voting power of all classes of stocks entitled to vote.

Q: What is wash sales?

A: It is a sale or other disposition of stock or securities where substantially identical
securities are acquired or purchased within 61-day period, beginning 30 days before
the sale and ending 30 days after the sale.

Q: What may be the subject of wash sale?

A: It may be shares of stocks, securities, including stock options.

Q: What is the significance in determining whether a transaction is a wash sale

or not?
A: If the transaction is a wash sale, the gain is taxable and the loss is not deductible.

Note: Loss from wash sales is merely an artificial loss and not actually sustained. The
seller can recover this loss through the subsequent sale of the same. In effect, the loss
can be recovered. So there is really no loss incurred or sustained as it is a mere
artificial loss.

Q: How are losses from wash sales treated?

A:
GR: Losses from wash sales are not deductible.

XPN: When the sale was made by a dealer in stock or securities and with respect to a
transaction made in the ordinary course of the business of such dealer, losses from
such sale is deductible. (Sec. 38, NIRC)