CAPITAL GAINS TAX

These are any other assets that does not fall under the definition of ordinary assets

Capital Assets

Ordinary Assets includes:

1. 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.

2. Properties held by the taxpayer primarily for sale to customers in the ordinary course of business.

3. Properties used in trade or business of a character which is subject to allowance for depreciation.

4. Real properties used in trade or business

Asset Classification:

Acquisition to be used in business

Ordinary Assets

Asset Classification:

Asset previously used then abandoned

Automatically become Capital Asset in 2 years, except those who are engaged in realty business

1. Real Property Developer

2. Real Property Lessor

3. Real Property Dealer

4. Person executed with at least 6 Real Property transaction in the prior year

Scheme of Taxation to be applied:

1. Sale of Domestic Stock Directly to Buyer

2. Sale of Real Property (Capital Asset)

3. Sale of Other Capital Asset

1. Sale of Domestic Stock Directly to Buyer - 15% CGT

2. Sale of Real Property (Capital Asset) - 6% CGT

3. Sale of Other Capital Asset - RIT (Dealings in Property)

Requisites of CGT on Sale of Domestic Stocks

1. There is a net gain

2. The capital asset sold is a domestic stock

3. The sale is made directly to the buyer

Formula of Stock Transaction Tax:

Gross Selling Price x 1% x 60%

Formula for CGT on the Sale of Domestic Stock

SP	xx
Cost	(xx)
Selling Expense: Commission Expense DST, if assumed by the seller (silent)	(xx) (xx)
Net Gain	xx
x CGT %	15%
Tax Due	xx

When to file the Capital Tax Returns?

1. Per Transaction Basis:

2. Annual Basis:

   a. For Individual

   b. For corporation

1. Per Transaction Basis: Within 30 days after each transaction

2. Annual Basis:

   a. For Individual - On or before April 15 of the following year

   b. For corporation - On or before the 15th day of the fourth month following the close of the taxable year

Identify the asset classification:

a. A lot purchased to be used as a future building site for his business but remained unused for 5 years due to political instability in the area

b. A currently unused back-up equipment.

c. A building that is converted as residence of the taxpayer

d. A used equipment that remained unused for more than 2 years

e. A warehouse building that is abandoned for more than 2 years

f. A brand new machinery acquired for the business but remained unused for more than two years due to delays in the acquisition of permits for the business

g. A fully depreciated truck that is still in used

h. An unsold open lot of a real estate developer who changed business to a hotel and restaurant business

i. Construction equipment of a real estate developer that remained unused for more than 2 years

j. A church building

k. A foreclosed collateral property held by the bank

a. OA

b. OA

c. CA

d. CA

e. CA

f. OA

g. OA

h. OA

i. OA

j. CA

k. OA

Formula for Documentary Stamp Tax

P1.50/200 X Par Value

Compute the DST if the Par Value is 250K and FV is 350K

1.50/200 × 250K = 1,875

On July 1, 2020, Andy sold his domestic stocks with aggregate par value of P250K and acquisition cost of P300K to Betty for P500K. Betty made a downpayment of P50K and signed a note for the balance payable in 9 semi-annual installments starting December 31, 2020. Andy paid for the documentary stamp tax.

1. Compute for the 2020 CGT

2. Compute the documentary stamp tax on the sale

DST: 1.50/200 × 250K = 1,875

Selling Price	500,000
Acquisition Cost	(300,000)
DST	( 1,875)
Net Gain	198,125
X GCT (%)	15%
CGT	29,719
X Installment (%)	20%
CGT, 2020	5,944

Downpayment	50,000
1st Installment (450K / 9)	50,000
Initial Payment	100,000
Initial Payment / Selling Price (100K / 500K)	20%

Deadline of DST

Within 5 days after the close of the month when taxable document was made

Rules on Wash Sales

No recognition of loss 30 days prior and after the loss occur, if there was identical shares acquired at the same period

Tax-free Exchanges: Corporate Re-adjustment

1. Initial Acquisition of Corporate Control (at least 51% 1 or more person)

2. Share-for-share swap in pursuant to a plan of merger or consolidation

Geo exchanged his A Company shares pursuant to a plan of consolidation where A Company will be integrated with B Company. The following relates to the exchange

Basis of A Company shares given	1.2M
Cash paid to B Company	100K
FV of A Company shares given	1.3M
FV of B Company shares received	1.1M
FV of other properties received from B Company	350K

1. Compute for the capital gain tax

2. What is the tax basis of the B Company received by Geo?

3. What is the basis of the “boot” or other properties received by Geo?

4. What is the basis of the A Company shares received by B Company?

	A	B
Cost	1.2M	1.1M
Other Asset Given Up	100K	350K
FV of Asset Given Up	1.3M	1.45M

Selling Price (FV of Asset Received)	1.45M
Cost	(1.3M)
Indicated Gain	150K

Other Asset Received from B Company = 350K = 150K realized gain + 250K Return of Capital

Realized Gain	150K
X CGT %	15%
CGT	22,500

Cost	1.2M
Cash Paid	100K
Return of Capital	(250K)
New Cost of A shares	1.1M

3. Other Asset Given Up by B Company = 350K

Selling Price (FV of Asset Received)	1.3M
Cost	(1.45M)
Indicated Loss	(150K)

1,450K - 100K (cash received) = 1,350,000

Requisites of Sale of Real Property Classified as Capital Asset:

1. The real property is located in the Philippines

2. The property is classified as capital asset

3. The taxpayer is an individual or a domestic corporation

4. The taxpayer is other than a foreign corporation

Scope of 6% CGT

1. All individuals

2. Domestic Corporation

Formula of CGT on Real Property Classified as Capital Asset

FMV or SP (whichever is higher) x 6%

Fair Market Value is equal to:

Higher amount between:

1. Zonal Value; or

2. Assessed Value

Nature of 6% Capital Gains Tax on Capital Asset

1. Final Tax

2. Transactional Tax

Formula of DST in 6% CGT

15/1,000 x FMV or SP (whichever is higher); or

1.5 x FMV or SP (whichever is higher)

Deadline of filing of 6% CGT and DST

CGT: 30 days from the date of sale

DST: 10 days End of Month

Exception from 6% CGT:

1. Exception Rule = CGT = 0 (Replacement of Residence)

2. Alternative Taxation Rule = 6% CGT or RIT

The sale of Capital Asset may be exempted from CGT provided that the following conditions are met:

1. The seller is an individual citizen or resident alien

2. The real property sold is his principal residence

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. Buyer of principal residence shall deduct 6%, deposit in cash or manager’s check in an interest-bearing account with an Authorized Agent Bank under an Escrow Agreement

9. 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.

Requisites for Alternative Taxation:

1. The seller is an individual

2. The buyer is the government, its political subdivisions or agencies or GOCCs

Andy sold his principal residence for 2.5M. He immediately repurchased a new residence for 2M. The FV of his residence is 3.5M. Compute for the CGT

3.5M > 2.5M = 3.5M x 6% = 210K x 0.5M / 2.5M = 42K

Compute for the basis of the cost if:

Old Residence	New Residence
SP 4M	PP 4M
FMV 5M
Cost 2M	Cost?

2M (carryover)

Compute for the basis of the cost if:

Old Residence	New Residence
SP 4M	PP 5M
FMV 5M
Cost 2M	Cost?

2M + 1M = 3M

Compute for the basis of the cost if:

Old Residence	New Residence
SP 4M	PP 3M
FMV 5M
Cost 2M	Cost?

2M x ¾ = 1.5M