CAPITAL GAINS TAXATION

Stephen Castro Galme, Jr., CPA

Classification of Taxpayer’s Properties Net Gain Computation

 Ordinary Asset Selling Price
□ Stock in trade or real property included Less:
in year-end inventory Basis of stocks disposed
□ Real property held for sale in ordinary Selling Expenses
course of business Documentary Stamp on Sale
□ Real property used in the business Net Capital Gain (Loss)
 Capital Asset – any asset other than
ordinary asset  Selling Price
Cash Sale Consideration received
Rules on Asset Classification Exchange Sale Fair value of property received
Future use in business Ordinary
Previous  Basis of Stocks Disposed
Discontinuance of active use
classification
Real property used in trade Ordinary
Cost
Depreciable asset Ordinary 1. Specific Identification
Real property used by exempt By Purchase
Capital 2. Moving Average
corporation 3. FIFO
Non-real estate taxpayers’
ordinary assets unused in Capital
business for more than 2 years Devise, Bequest,
Fair value at the time of death
Inheritance

Types of Gains on Dealings of Properties Lower of:

 Ordinary Gain – sale, exchange, and other Fair value at time of gift or basis
Gift
disposition, including pacto de retro sales of in the hands of preceding non-
ordinary assets gift owner
□ REGULAR INCOME TAX Inadequate
Paid by transferee
Consideration
 Capital Gain – sale, exchange, and other Tax-free Exchanges Substituted basis
disposition, including pacto de retro sales of
ordinary assets Fair Value
□ CAPITAL GAINS TAX:
o domestic stocks directly to buyer Selling Price
} Transfer Tax

(based on net gain)

 5% - first 100k Cost & Expenses } Capital Gains Tax

 10% - above 100k

o real property not used in business Scope of CGT
 6% on HIGHER of selling  ALL taxpayers and corporations
price or fair value
□ REGULAR INCOME TAX: 5%-10% CGT Tax Compliance
 other capital assets  Reporting
□ Transactional CGT (BIR Form 1707)
SALE, EXCHANGE, AND OTHER □ Annual CGT (BIR Form 1707-A)
DISPOSITION OF DOMESTIC STOCKS
Transactional Capital Gains
EXEMPT from 5%-10% CGT on Stocks: Less: Transactional Capital Losses
1. Dealers in securities Annual Net Capital Gain or Loss
2. Gains realized on redemption of Less: Transactional CGT paid___
shares in mutual fund CGT Payable (Refundable)
3. Specifically exempt from income
tax  Deadline
a) Foreign Governments □ Individual
b) Qualified Employee Trust Funds o April 15th of next taxable year
□ Corporate
Modes of Disposing Domestic Stocks o April 15th of next taxable year OR 15th
 Through the PSE day of the fourth month after the
□ FINAL WITHHOLDING TAX: taxable year
 ½ of 1% of the selling price
□ If dealer of stocks: Installment Payment of 5%-10% CGT
o Gain: item of gross income  Requisites
o Loss: deduction against gross income 1. Selling price exceeds 1,000
2. Initial payment (payments for the year)
 Directly to buyer does not exceed 25% of the selling price
□ (based on net gain)  Allocation of CGT Payable
5% - first 100k
10% - above 100k Collection___ x CGT Tax
Contract Price
CAPITAL GAINS TAXATION
Stephen Castro Galme, Jr., CPA
Note: Contract Price = Selling price less
mortgage assumed
Special Tax Rules in Capital Gain or Loss
Measurement
 Wash Sales
 Tax-free Exchanges
□ Merger or Consolidation
□ Corporate Control
Wash Sales – when 30 days before and/or 30
days after sales of securities, taxpayer purchased
substantially identical securities (stocks and bonds)
Note: not applicable to dealers in securities (buying
and selling of stocks in short periods of time)
Selling Price
Less: Cost of Shares Sold
Net Capital Gain (Loss)
 Capital loss on wash sale is not deductible
against annual net capital gains
Acquisition of Identical Shares Before or
After a LOSING Sale
 Full Replacement – quantity of shares
acquired is at least equal to the quantity of
shares sold
Purchase Price
Add: Deferred Loss (Capital Loss)
Basis of Replacement Shares
 Partial Replacement – shares acquired is
less than shares sold
□ Deferred Loss:
Purchased Shares___ x Capital Loss
Sold Shares
□ Deductible Loss:
Deficit Shares___ x Capital Loss
Sold Shares
Purchase Price
Add: Deferred Loss (Capital Loss)
Basis of Replacement Shares
Acquisition of Identical Shares Before AND
After a LOSING Sale
 SAME as PARTIAL REPLACEMENT,
then allocate deferred loss to the replacement
shares purchased
Tax-Free Exchanges
Merger or Consolidation
 Replacement of shares of shareholders of the
absorbed corporation with them simply being
integrated as the shareholders of the acquiring
corporation
 Gain or losses on share-for-share swaps
pursuant to a merger or consolidation –
NOT recognized for taxation purposes
Initial Acquisition of Control
 Control – 51% of voting power
 Gains or losses of a person, or together not
exceeding four persons, the exchange of
shares for property resulted in a control of the
said corporation
 Considered as an investing transaction
Tax-Free Exchanges Not Solely for Stocks
 GAINS but not losses are recognized up to
the extent of cash and other properties
received
□ Cash and Property Received Exceed
Indicated Gain
Total Consideration Received
Less: Cost of Shares Exchanged
Indicated Gain
Allocation of Total Cash and Other
Properties Received:
Realized Return of Capital
(To the extent of the indicated gain)
Less: Return of Capital
(In excess of the indicated gain)____
Total Cash and Other Properties
Received
Substituted Basis of the Shares
Exchanged
Basis of Shares Exchanged
Less: Return of Capital____
Basis of Shares Received
□ Indicated Gain Exceeds Cash and
Property Received
Total Consideration Received
Less: Cost of Shares Exchanged
Indicated Gain
*Allocation of Total Cash and Other
Properties Received:
Realized Gain
(Up to the value of the cash and other
properties)
Less: Unrealized Return of Capital
(In excess of value of the cash
and other properties)___________
Total Indicated Gain
Substituted Basis of the Shares
Exchanged
Basis of Shares Exchange =
Basis of Shares Received
Minimum Public Float Requirement of
Publicly Listed Corporations
 HIGHER of:
□ 10% of issued and outstanding shares
□ minimum public ownership required by
SEC or PSE
CAPITAL GAINS TAXATION
Stephen Castro Galme, Jr., CPA

Comprehensive Illustrations Location of Taxpayers

(Banggawan) Real Property Individuals Corporation
CGT Within Phil ALL Domestic only
Nil or zero Outside Phil N/A N/A
Sale by a security dealer
(subject to RIT)
Nil or zero Note: Capital gains on sale of real property
Sale of domestic bonds
(subject to RIT) abroad is subject to RIT for domestic
Exchange of stocks for other corporations, RC, NRC, and RA. For all other
CGT
securities taxpayers, capital gain realized abroad is exempt.
Nil or zero (part
of corporate EXEMPT from the 6% CGT on Real
Issuance of own stocks
capital, not Property
income) 1. Alternative Taxation Rule
 Seller is an individual taxpayer and seller
Sale of Stocks Dividend-On of real property
 between date of declaration and date of record  Buyer is the government or
 selling price of stocks includes both the price instrumentalities (GOCCs)
of the stocks and the dividends on the stock  Subject to:
 If sold to an individual: □ 6% CGT or
□ RIT
Selling Price
Less: Cost of Stocks and Expenses 2. Exemption under NIRC
Net Dividends Receivable  Sale, exchange, and other disposition of
(already net of 10% FWT)___ a principal residence (primary
Capital Gains domicile) for the reacquisition of a new
principal residence
 If sold to a corporation:  REQUISITES:
1. Seller must be citizen or resident
Selling Price alien
Less: Cost of Stocks and Expenses 2. Involves principal residence
Dividends Receivable_______ 3. Proceeds are for acquisition of new
Capital Gains principal residence
4. BIR Notification through BIR FORM
1706 within 3o days and “Sworn
Sale of Stocks Ex-Dividend Declaration of Intent”
 between date of record and date of payment 5. Reacquisition of new principal
 selling price of stocks includes only the price residence within 18 months
of the stocks 6. Capital gain held in escrow in favor
of government
Selling Price 7. Exemption can be availed of once in
Less: Cost of Stocks and Expenses 10 years
Capital Gains 8. Historical cost or adjusted basis of
residence sold shall be carried over to
SALE, EXCHANGE, AND OTHER the new principal residence
DISPOSITION OF REAL PROPERTY
 Full Utilization of Proceeds
 6% of HIGHER of: □ EXEMPT from CGT
□ Selling Price □ Basis of new residence
□ Fair Value (HIGHER of)
o Zonal Value Basis of Old Residence
o Assessed Value Add: Additional out-of-pocket costs
(Purchase Price of New –
Note: Appraised value is not used in Selling Price of Old)________
computation of CGT Basis of New Residence

 6% CGT applies even if the sale resulted

to a loss  Partial Utilization of Proceeds
□ Gain is always presumed to exist □ Partially exempt from CGT
 6% CGT applies even if the sale is
involuntary Unutilized Proceeds___ x CGT
□ Expropriation Sale Total Proceeds
□ Pacto de Retro Sale
□ Foreclosure Sale
□ Forced Disposition □ Basis of new residence
□ Judicial Order
Utilized Proceeds___ x Cost of Old Residence
Scope and Applicability of the 6% CGT Total Proceeds
CAPITAL GAINS TAXATION
Stephen Castro Galme, Jr., CPA

3. Exemption under Special Laws □ Tax base – HIGHER of Gross

 Sale of land pursuant to the Comprehensive Selling Price or Fair Value
Agrarian Reform Program o Php 15 per every Php 1,000 of the
 Sale of socialized housing units by the par value of the stocks
National Housing Authority
Note: If the government is a party to the sale, tax
Installment Payment of 6% CGT base shall be the consideration paid
 Initial Payment does not exceed 25% of
the selling price
□ Initial Payment – collections for the
taxable year the sale is made

 Without Mortgage

Initial Payment___ x CGT

Selling Price

 With Mortgage NOT in Excess of Cost

Initial Payment_____ x CGT

Contract Price
(Selling Price – Mortgage)

 With Mortgage in Excess of Cost

□ Initial Payment

Collections
Add: Constructive Downpayment or
Excess Mortgage (Mortgage – Cost)
Initial Payment

□ Contract Price

Selling Price
Less: Mortgage Assumed
Cash Collectible
Add: Constructive Downpayment or
Excess Mortgage (Mortgage – Cost)
Contract Price

o For the Sale

Constructive Downpayment__ x CGT

Contract Price

o For every installment

Installment_____ x CGT
Contract Price

6% CGT Tax Compliance

 BIR Form 1706
 Deadline
□ within 30 days from the date of sale or
exchange

DOCUMENTARY STAMP TAX ON THE SALE

OF CAPITAL ASSETS
 Sale, exchange, and other disposition
of domestic stocks directly to buyer
□ Php 0.75 per every Php 200 of the par
value of the stocks sold

 Sale, exchange, and other disposition

of real properties