Module No.
4 – Capital Gains Tax
Learning Outcome/s:
To have a better understanding of what is capital gains tax including its scope and nature
Core Values/Biblical Principles:
Workplace spirituality includes many aspects like meaningful work, sense of community, and
organizational value. It is intended to interconnect past experiences and develop trust among
employees in a way that would lead the organization into a better and productive environment. If there
is no spirituality in the workplace, the organizational environment becomes challenging which would
create hurdles and issues.
Introduction:
Capital gains tax is a type of tax imposed on certain passive income. It is imposed on gains from the sale,
barter, exchange or other disposition of capital assets such as stocks and real properties.
Final tax na iniimpose lang on certain passive income, walang participation yung taxpayer. Pag active na
yung income or galling sa regular course of business then RIT na sya papasok
Dalawa lang yung types ng gain na tinataxan
1. Stocks
2. Real Properties
Body:
Classification of Taxpayer’s Properties
1. Ordinary assets – assets used in business, such as:
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 (e.g., inventories and property, plant and
equipment)
2. Capital assets – any other assets that does not fall under the definition of ordinary assets, such
as:
a. Personal (non-business) assets; and
b. Financial assets (e.g., cash, receivables, investments) and intangible assets (e.g., patent,
copyright) of the taxpayer
Pag di mo ginagamit sa business capital assets yun
Gains arising from sale of ordinary assets are called ordinary gains while gains arising from capital assets
are called capital gains. All ordinary gains are taxable under regular income taxation. Capital gains are
taxable under capital gains tax or under regular income tax.
Asset Classification Rules
1. 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.
2. Discontinuance of the active use of the property does not change its character previously
established as a business property.
3. Real properties used, being used, or have been previously used in trade of the taxpayer shall be
considered ordinary assets.
4. 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 proof that the same
have not bee used in business for more than 2 years prior to the consummation of the taxable
transaction involving such property.
5. 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.
6. Real properties used by an exempt corporation in its exempt operations are considered capital
assets.
7. 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.
8. 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.
9. Change in business from real estate to non-real estate business shall not change the classification of
ordinary assets previously held.
Capital Gains Subject to Final Tax – Di na required magfile ng income tax returns yung payor
1. 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.
Pag sa Philippine Stock Exchange ka nagbenta ng stocks, di sya mas-subject sa capital gains tax kase
capital gains tax ay imposable lang sa mga binenta directly to the buyer
Pag through PSE, Stock Transaction Tax or STP
Domestic stocks – are evidence of ownership or rights to ownership in a domestic corporation
regardless of its features, such as preferred stocks, common stocks, stock rights, stock options, stock
warrants and unit of participation in any association, recreation or amusement club.
The term other disposition does not include:
a. Issuance of stocks by a corporation - wala pang gain – Financial Transaction
b. Exchange of stocks for services – No gain or Loss
c. Redemption of shares in a mutual fund – exempted by the Tax Code from income tax –
EXEMPTED by the NIRC
d. Worthlessness of stocks – considered as capital loss subject to the rules of RIT
e. Redemption of stocks for cancellation by the issuing corporation
f. Gratuitous transfer of stocks – Subject to Transfer Tax
Capital gains tax rate: 15% Dati, nung NRIC pa before 2018, CGT ng dom stocks is 5% (first 100K) and
10% (sa excess ng 100k); 2018 na Train Law na
Tax base: Net capital gain which is the excess of the amount realized on the sale (selling price) over
the basis or adjusted basis (basis of the shares sold plus expenses of sale/disposition) of the shares
Tax basis:
If acquired by purchase – cost of the property (specific identification, moving average, FIFO) -
If acquired by devise, bequest, or inheritance – fair value at the time of death of the decedent
If acquired by gift – lower of the fair market value at the time of gift and basis in the hand of the
donor or the last preceding owner by whom it was not acquired by gift
If acquired for inadequate consideration – amount paid by the transferee of the property
If acquired under tax-free exchanges – substituted basis of the stocks
This CGT does not apply to:
a. Gains on sale of share of stocks traded in the Philippine Stock Exchange (PSE) – Stock transaction
tax of 60% of 1% of Selling Price
Total Selling Prices of stocks through PSE XX
Multiply by: Transaction Tax Rate XX
Transaction Tax XX
b. Gains under similar conditions by security brokers and dealers – ordinary course of trade nila
yan, yan yung business nila kasi ordinary gains nila yan
Persons not liable to pay 15% CGT:
a. Dealers in securities – RIT nila yon
b. Investors in shares of stocks in a mutual fund company in connection with gains realized upon
redemption of stocks in the mutual company
c. All other persons, whether natural or juridical, who are specifically exempt from national
revenue taxes under existing laws
Documentary Stamp Tax (DST)
Par value stock: Php 1.5/200 or fractional part of the par value
No-par value stock: 25% of the DST paid on the original issue of said stock (The DST on the
original issue of the no-par stock is based on actual consideration for the issuance)
Deadline: within 5 days after the close of the month when the taxable document was made,
signed, issued, accepted, or transferred
Illustration
Taxpayer A disposed his investments in domestic stocks costing Php 100,000 directly to a buyer. He
paid Php 2,000 and Php 500, respectively, on the sale for broker’s commission and documentary
stamp tax. The selling price is Php 200,000.
Selling price Php 200,000
Less: Cost and expenses
Purchase cost Php 100,000
Commission expense 2,000
DST 500 102,500
Capital gain Php 97,500
Multiply: CGT rate 15%
Capital gains tax Php 14,625
Documentary stamp tax is deducted if paid by seller
Illustration
Taxpayer B disposed several equity securities directly to a buyer during the calendar year ending
December 31, 2020:
Date Equity Securities Selling Price Cost and Expenses Capital gain/loss CGT
3/20 Preferred stock Php 160,000 Php 100,000 Php 60,000 Php 9,000
5/18 Common stock 70,000 90,000 (20,000) -
7/24 Stock rights 100,000 60,000 40,000 6,000
10/15 Stock options 80,000 110,000 (30,000) -
Total Php 50,000 Php 15,000
Annual net capital gain Php 50,000
Multiply: CGT rate 15%
Annual CGT due Php 7,500
Less: Total transactional CGT paid 15,000
CGT payable/(refundable) Php (7,500)
When a domestic stock is sold in installments, the capital gains tax may also be paid in installments
if:
1. The selling price exceeds Php 1,000; and
2. Initial payment does not exceed 25% of the selling price.
Capital Gains Tax Payable = Collections / Contract Price x Capital Gains Tax
Illustration
On November 1, 2020, Mr. C made a sale of domestic stocks costing Php 700,000 directly to a buyer
for Php 1,000,000. The stocks were previously mortgaged for Php 600,000 which the buyer
assumed. The balance is payable in Php 100,000 monthly installments starting November 30.
Selling price Php 1,000,000
Less: Cost 700,000
Net capital gain Php 300,000
Multiply: CGT rate 15%
Capital gains tax Php 45,000
Initial payment ratio = 200,000/1,000,000 = 20%. Mr. C is qualified to pay the CGT in installments.
Contract price = Selling price – Mortgage assumed = 1,000,000 – 600,000 = Php 400,000
CGT payable for every installment = 100,000/400,000 x 45,000 = Php 11,250
Illustration
Assume that the mortgage assumed by the buyer is Php 800,000 and the selling price is Php,
1,200,000.
Selling price Php 1,200,000
Less: Cost 700,000
Net capital gain Php 500,000
Multiply: CGT rate 15%
Capital gains tax Php 75,000
Constructive receipt (excess mortgage) Php 100,000
November 30 installment 100,000
December 31 installment 100,000
Initial payment Php 300,000
Initial payment ratio = 300,000/1,200,000 = 25%
Selling price Php 1,200,000
Less: Mortgage assumed 800,000
Cash collectible Php 400,000
Add: Excess mortgage 100,000
Contract price Php 500,000
Contract Price = Net Capital gain pag Mortgage assumed ay mas Malaki sa cost
CGT upon the sale = 100,000/500,000 x 75,000 = Php 15,000
CGT payable for every installment = 100,000/500,000 x 75,000 = Php 15,000
Wash Sales – occur when within 30 days before and 30 days after the sale (also referred to as the
61-day period), the taxpayer acquired or entered into a contract or option to acquire substantially
identical securities. Capital losses on wash sales by non-dealers of securities are not deductible
against capital gains.
Requisites:
a. Sale of securities at a loss
b. Identical securities were purchased within 61-day period, beginning 30 days before the sale and
ending 30 days after the sale
c. The taxpayer is either: (a) not a dealer in securities, or (b) if a dealer, the sale was not made in
the ordinary course of business.
Non-deductible loss = No. of shares acquired w/in 61-day period x Loss
No. of shares sold
New tax basis/cost of re-acquired shares = Cost of acquisition + Wash sale loss
Illustration
In 2020, Mr. D had the following transactions in the share of XYZ Corporation, a domestic
corporation:
Date Transaction Shares Price per share Value
1/10 Purchase 12,000 Php 12 Php 144,000
2/16 Purchase 4,000 21 84,000
3/1 Sale* 10,000 10 100,000
3/5 Purchase 5,000 16 80,000
4/9 Purchase 7,000 14 98,000
*Purchased on January 10.
Capital loss = (10 – 12) x 10,000 shares sold = 20,000
There were 10,000 shares sold at a loss and there were 9,000 replacement shares in the 61-day
period (4,000 shares purchased on February 16 and 5,000 shares on March 5). Since there is a partial
replacement, the capital loss shall be split as follows:
Deferred loss (9,000/10,000 shares x 20,000) Php 18,000
Deductible loss (1,000/10,000 shares x 20,000) 2,000
Capital loss Php 20,000
Deferred Loss – iaadd sa cost ng replacement shares
Purchase price Php 84,000
Add: Deferred loss (4,000/9,000 x 18,000) 8,000
Adjusted basis of the 4,000 replacement shares on February 16 Php 92,000
Purchase price Php 80,000
Add: Deferred loss (5,000/9,000 x 18,000) 10,000
Adjusted basis of the 4,000 replacement shares on March 5 Php 90,000
Dine defer mo lang yung recognition ng loss mo
Tax Free Exchanges
a. Exchange of stocks pursuant to a merger or consolidation
b. Transfer of stocks resulting in corporate control – no gain or loss shall be recognized if property
is transferred to a corporation by a person in exchange for the stocks or units of participation in
such a corporation of which as a result of such exchange, said person, alone or together with
others not exceeding four, gains control of said corporation.
Note: If stocks are exchanged not solely for stocks but with other consideration, the gains but not
losses are recognized up to the extent of cash and other properties received.
Tax basis of old shares exchanged Php xxx
Add: Gain recognized on the transfer xxx
Less: Cash or other properties received xxx
Tax basis of the new shares received Php xxx
Illustration
Pursuant to the plan of merger between ABC Corp. and DEF Corp., Mr. G was required to surrender
his ABC shares costing Php 1,000,000 in exchange for DEF shares with total fair value of Php 900,000
plus cash amounting to Php 300,000.
Total consideration received Php 1,200,000
Less: Cost of stocks exchange 1,000,000
Gain* Php 200,000
*This shall be reported as a capital gain.
Take note nap ag merong merger or consideration, hindi dya taxable pag shares kapalit ng shares
lang. Pero pag may other consideration such as cash, yung gain ay matataxan
Tax basis of ABC shares exchanged Php 1,000,000
Add: Gain recognized on the transfer 200,000
Less: Cash or other properties received 300,000
Tax basis of DEF shares received Php 900,000
Illustration
Assume that Mr. G received DEF share with a fair value of Php 1,050,000 plus Php 150,000 cash.
Total consideration received Php 1,200,000
Less: Cost of stocks exchange 1,000,000
Gain* Php 200,000
*The reportable capital gain shall only be up to the extent of the realized gain/other consideration
received, in which case is Php 150,000.
Tax basis of ABC shares exchanged Php 1,000,000
Add: Gain recognized on the transfer 150,000
Less: Cash or other properties received 150,000
Tax basis of DEF shares received Php 1,000,000
BIR Forms to be filed:
a. BIR Form No. 1707 – filed within 30 days after each transaction
b. BIR Form No. 1707-A (Final Consolidated Return) – filed on or before April 15 of each year
covering all stock transactions of the preceding year
When to pay the capital gains tax:
a. Lump sum: upon the date of filing the return with the BIR (within 30 days from the date of sale)
b. Installment: within 30 days from receipt of each installment
2. 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.
Capital gains tax rate: 6%
Tax basis: higher of the gross selling price or fair market value
Note: For purposes of CGT, fair market value is whichever is higher of: (1) zonal value as prescribed
by the Commissioner of Internal Revenue or (2) assessed value as determined by the Provincial or
City Assessor’s Office.
Gross selling price – 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.
Illustration
A resident citizen sold a parcel of land costing Php 3,000,000 for Php 5,000,000. The land has an
appraisal value, zonal value and assessed value of Php 7,000,000; 6,000,000; and 4,500,000,
respectively.
Appraisal Value DI KASAMA KAHIT MAS MATAAS PA SYA
Capital gains tax due = 6,000,000 x 6% = Php 360,000
BIR Form to be filed:
BIR Form No. 1706 – filed within 30 days following each sale, exchange or disposition of real
property
Documentary Stamp Tax (DST)
Php 15/1,000 or fractional part of the selling price
Deadline: within 5 days after the close of the month when the taxable document was made,
signed, issued, accepted or transferred
How is the capital gains tax paid:
a. The tax is withheld at source – the seller and buyer files a joint capital gains tax return (one
return per sale or foreclosure sale)
b. Installment – the tax is withheld at source in installments when the taxpayer qualifies and opted
to be taxed on installments (one return for each installment payment received)
Illustration
On November 1, 2020, a taxpayer sold a lot with a cost and fair value amounting Php 3,000,000 and
Php 4,000,000, respectively. The selling price is Php 5,000,000. The buyer agreed to pay Php 500,000
monthly installments starting November 30, 2020.
Capital gains tax = 5,000,000 x 6% = Php 300,000
Initial payment = Php 1,000,000
Initial payment ratio = 1,000,000/5,000,000 = 20%
The CGT is qualified to be paid under installment method.
CGT payable for every installment = 500,000/5,000,000 x 300,000 = Php 30,000
Alternative taxation – Forced sale to the State under eminent domain
If the sale is made to the government or any of its political subdivisions or agencies, or to
government-owned or -controlled corporations, the taxpayer may choose either (a) to have the gain
included in his income tax return under the graduated rates or the 8% tax or (b) to be subject to the
capital gains tax.
Illustration
The government invoke its power of eminent domain to buy the lot of a taxpayer for the expansion
of a highway. The lot costing Php 700,000 was sold for Php 1,000,000.
The taxpayer may opt to be subject to 6% CGT on the Php 1,000,000 or report the gain amounting to
Php 300,000 (1,000,000 less 700,000) in his annual income tax return.
The sale may be exempted from the payment of capital gains tax if 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 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 conclusively 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:
Capital Higher of gross selling price or fair x Unutilized portion x 6%
gains tax = market value at the date of sale 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 in determining gain or losses in disposal of the related property if the related transaction
is taxable under the progressive system of taxation. Generally, the cost is the tax basis when a
property is acquired by purchase.
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. On the other, 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:
New cost basis = Utilized proceeds x Basis of the old principal residence
Gross selling price
More than full utilization of proceeds:
New cost basis = Basis of the old principal residence + Additional expenditures in excess of proceeds
Illustration
A taxpayer sold his principal residence with a fair market value of Php 7,000,000 for Php 6,000,000.
The purchase price of the residence is Php 5,000,000.
The imposable CGT is Php 420,000. The taxpayer should indicate his intention to apply for
exemption in the CGT return to be filed and submit a Sworn Declaration of Intent. He will be
required to deposit Php 420,000 CGT in an escrow account in favor of the government.
Consequently, the taxpayer acquired a new principal residence within 18 months. If the proceeds
are fully utilized, the tax basis of the new residence shall be the basis of the old residence plus
additional cost incurred.
Illustration
Assume that the taxpayer only used Php 5,500,000 of the Php 6,000,000 proceeds in acquiring his
new residence. The unused portion of the proceeds shall be subject to tax.
To taxpayer (5,500,000/6,000,000 x Php 420,000) Php 385,000
CGT payable to the gov’t. (500,000/6,000,000 x Php 420,000) 35,000
Total amount in escrow Php 420,000
New cost basis = 5,500,000 x 5,000,000 = Php 4,583,333
6,000,000
Summary:
Capital gains tax is a type of income tax imposed on the gains presumed to have been realized by the
seller from the sale, exchange or other disposition of capital assets located in the Philippines.
References:
Income Taxation, Rex Banggawan 2019 Edition
