ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 47  May 2024 CPA Licensure Examination

TAX-1101
TAXATION Prepared By: A. S. TAMAYO
For TeamTax: A. TAMAYO  E. GARCIA  G. CAIGA  C. LIM  K. MANUEL J. TAGLE

CAPITAL ASSETS, CAPITAL GAINS & LOSSES

1. Capital Assets
a. Capital assets defined The term "capital assets" means property held by the taxpayer (whether or not
connected with his trade or business), but does not include:
1) stock in trade of the taxpayer or
2) 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, or
3) property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or
4) property used in the trade or business, of a character which is subject to the
allowance for depreciation; or
5) real property used in trade or business of the taxpayer.

b. Exercise: Classify the following into capital asset or ordinary asset

Classification Number
1. Accounts receivable
2. Securities held as investment
3. Interest of a partner in a partnership
4. Apartment house
5. Inventories of raw materials, work in process and finished goods
6. Office equipment
7. Land used in business
8. Land for sale by a real estate dealer
9. Residential house and lot
10. Car for personal use

2. Terms Associated with Capital Assets

a. Net capital gain The term "net capital gain" means the excess of the gains from sales or exchanges of
capital assets over the losses from such sales or exchanges.
b. Net capital loss The term "net capital loss" means the excess of the losses from sales or exchanges of
capital assets over the gains from such sales or exchanges.
c. Holding period The length of time the asset was held by the taxpayer. It covers the period from the
date of acquisition to the date of sale.

3. Percentage Taken Into Account

In case of taxpayer, other In the case of a taxpayer, other than a corporation, only the following percentages of
than a corporation the gain or loss recognized upon the sale or exchange of a capital asset shall be taken
into account in computing net capital gain, net capital loss, and net income:
(1) One hundred percent (100%) if the capital asset has been held for not more than
twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12)
months

4. Limitation of Capital Loss

Limitation on capital loss Losses from sales or exchanges of capital assets shall be allowed only to the extent of
the gains from such sales or exchanges.

If a bank or trust company incorporated under the laws of the Philippines, 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 thereof), with interest coupons or in
registered form, any loss resulting from such sale shall not be subject to the foregoing
limitation and shall not be included in determining the applicability of such limitation to
other losses.

5. Net Capital Loss Carry-Over

Net capital loss carry-over of If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss,
taxpayer other than a such loss (in an amount not in excess of the net income for such year) shall be treated in
corporation the succeeding taxable year as a loss from the sale or exchange of a capital asset held for
not more than twelve (12) months.
6. Retirement of Bonds, Etc.
Amount received upon the Amounts received by the holder upon the retirement of bonds, debentures, notes or
retirement of bonds certificates or other evidences of indebtedness issued by any corporation (including those
issued by a government or political subdivision thereof) with interest coupons or in
registered form, shall be considered as amounts received in exchange therefor.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
CAPITAL ASSETS, CAPITAL GAINS & LOSSES TAX-1101
7. Gains and Losses from Short Sales, Etc.
Gains and losses from short For purposes of this capital gains and losses:
sales and options (1) Gains or losses from short sales of property shall be considered as gains or losses
from sales or exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise privileges or options to buy or
sell property shall be considered as capital gains or losses

8. Exercise
AST Corporation has the following data for the years 2021 and 2022:
2021: Gross income P250,000
Business expenses 180,000
Capital loss (capital asset was acquired on January 15, 2021 and was sold on March 15, 2021) 50,000
Capital gain (capital asset was acquired on January 15, 2019 and was sold on March 31, 2021) 30,000

2022: Gross income P500,000

Business expenses 400,000
Capital gain (capital asset held for 12 months) 60,000
Capital loss (capital asset held for more than 12 months) 20,000

Question 1 - How much is the taxable net income in 2021 and 2022?
2 - Assuming the taxpayer is an individual taxpayer, single resident citizen, how much is the taxable net
income in 2021 and 2022?

9. General professional partnership

Accounting for capital gains Capital gains or losses of the general professional partnership will be accounted for by
or losses of general the partners in proportion to their interest in the partnership.
professional partnership

10. Sales of Capital Assets Which Are Subject to Capital Gains Tax (Final Tax)
a. Sale of shares of stock not traded in the local stock exchange (15% based on net capital gains)
b. Sale of real property classified as capital asset (6% based on selling price or FMV whichever is higher)

11. Transactions Resulting in Capital Gains or Losses (No Sale or Exchange)

a. Worthless shares of stock If shares of stock become worthless during the taxable year and are capital assets,
the loss shall be considered as a loss from the sale or exchange of capital assets on
the last day of such taxable year.
b. Worthless bonds If bonds, debentures, or other evidence of indebtedness of any corporation (including
those issued by the Government) are ascertained to be worthless and charged off
within the taxable year and are capital assets, the loss shall be considered as a loss
from the sale or exchange of capital assets on the last day of such taxable year.
c. Retirement of bonds Amounts received by the holder upon the retirement of bonds, debentures or other
evidence of indebtedness issued by any corporation (including those issued by the
government) with interest coupon or in registered form, shall be considered as
amounts in exchange thereof.
d. Short sales of property Gains or losses from short sales of property shall be considered as gains or losses
from sales or exchanges of capital assets.
e. Option gains or losses Gains or losses on account of failure to exercise a privilege or options to buy or sell
property are considered as capital gains or losses as the case may be.
f. Liquidating dividends When a corporation distributes all of its assets in complete liquidation, the gain or
loss sustained by the stockholder, whether individual or corporate, is capital gain or
losses as the case may be.
g. Liquidation of partnership When a partner retires or the partnership is dissolved, he realizes gain or loss as
follows:
Amount received for his interest xxx
Less: Investment xxx
Share in the undistributed partnership income
which has been reported as income xxx xxx
Gain (loss) xxx

12. Exercises
1) In 2018, a general professional partnership was organized. Binky Reyes contributed P500,000 for a 60% interest. The
partnership’s net income in 2018 was P750,000, and in 2019 P800,000. The net income in 2018 was distributed to the
partners while no distribution of income was made in 2019.

In 2020, the partnership was dissolved, and Ms. Reyes received P700,000 as her share in the liquidation.

How much was the capital gain (loss) of Binky in 2020?

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
CAPITAL ASSETS, CAPITAL GAINS & LOSSES TAX-1101
2) Rowena expects that within a week, the market price of Angeles Corporation shares, which is selling at P10 per share, is
going down. She does not have Angeles Corporation shares so she calls up her stockbroker and asks him to sell for her
10,000 shares of Angeles Corporation shares. Rowena and the stockbroker agree that the sold shares are to be replaced
within one week after the sale.

The stockbroker sells for Rowena the 10,000 shares at P10 per share. One week after, when the sold shares are about to
be replaced, the selling price of Angeles Corporation shares rises to P16 per share, contrary to Rowena’s expectation.
Nevertheless, she orders her stockbroker to buy for her 10,000 Angeles Corporation shares to cover the same number of
shares she borrowed a week ago.

How much is the capital gain (loss) from the short sale?

3) A single taxpayer has the following income, expenses and transactions in 2023:

Gross sales P1,500,000

Cost of sales 300,000
Business expenses 75,000
Health insurance premium paid 2,000
Selling price, partnership interest (investment in 2015 was P20,000) 60,000
Gain on sale of personal car held for 3 years 10,000
Loss on sale of jewelry for personal use held for 6 months 5,000
Loss on account of failure to exercise two-month option to buy 4,000
Liquidating dividend (investment in 2016, P100,000) 80,000
Gain on short sales 2,000

REQ 1 - Compute the net capital gain (loss)

2 – Tax due if the taxpayer failed to indicate in his first quarter return the desire to be taxed at 8% income tax rate
3 – If the taxpayer opts to be taxed at 8% income tax rate, how much is the quarterly percentage tax due?

Net capital gain (loss)

Gain on sale of partnership interest (50% x 40,000) P20,000
Gain on sale of personal car (50% x 10,000) 5,000
Loss on sale of jewelry (100% x 5,000) ( 5,000)
Loss on failure to exercise two-month option to buy (100% x 4,000) (4,000)
Loss on liquidating dividend (50% x 20,000) (10,000)
Gain on short sales (100% x 2,000) 2,000
Net capital gain P 8,000

2 – Tax due
Gross sales P1,500,000
Less: Cost of sales 300,000
Gross income 1,200,000
Less: Business expenses 750,000
Income from operation 450,000
Add: Non-operating income
Net capital gain 8,000
Total taxable income P 458,000
Income tax due Sec. 24 (A) P 34,100

3 – None, not subject to percentage tax. 8% tax is in lieu of percentage tax and Sec. 24 (A).

-=END=-

THOT: “Not everything that counts can be counted. Not everything that can be counted counts.”- Anon.

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