CHAPTER 6 CAPITAL GAINS

ordinary assets

used in business

capital assets

any assets other than ordinary assets

ordinary assets are basically:

a. assets held for sale

b. held for use

capital assets

1. personal asset of individual taxpayers

2. business assets of taxpayers:

   a. Financial assets: such as cash, receivables, prepaid

   b. intangible assets- such as patent, copyrights, leasehold rights

ASSET CLASSIFICATION IS RELATIVE

the classification of assets or properties ordinary or capital asset does not depend upon the nature of the property, but upon the NATURE OF THE TAXPAYERS BUSINESS AND ITS USAGE

domestic stock - ordinary asset

for a dealer in securities

domestic stock— capital asset

for a non-dealer in securities

a vacant and unused lot-ordinary asset

for a realty dealer, realty developer, or lessor

a vacant and unused lot-capital asset

for a non-realty dealer, realty developer, or lessor

REAL AND OTHER PROPERTIES ACQUIRED BY BANKS

is an ordinary assets even if banks are not engaged in realty business.

REAL AND OTHER PROPERTIES IN THE FORM OF DOMESTIC STOCKSS HELD BY BANKS

ARE CAPITAL ASSETS

STOCKS CLASSIFIED AS CAPITAL ASSETS

MEANS ALL STOCKS AND SECURITIES HELD BY TAXPAYERS OTHER THAN DEALERS IN SEECURITIES.

PROPERTY PURCHASED FOR FUTURE USE IN BUSINESS

is an ordinary asset

discontinuance of the active use of the property

does not change its character previously established as a business property

real properties used, being used, or have been previously used, in trade of the taxpayers

is an ordinary assets

properties classified for the used in business by the taxpayer not engaged in the real estate business

are automatically converted to capital assets upon showing the proof that the same have not been used in business for more than 2yrs prior to consumantion

depreciable asset even fully depreciated or there is a failure to depreciate

is an ordinary asset

real properties used by an exempt corporation in its exempt operations

capital assets ( exempt corporations are not business )

property transferred by sale, barter, or exchange, inheritance, donation, or declaration of property

shall depends on the acquirer uses its business.

real properties subject of involuntary transfer such as expropriation and foreclosure sale,

no effect on classification

change in business from real estate to non-real estate

shall not change ordinary assets previously held.

real estate business

real estate dealer

real estate developer

taxpayers habitually engaged in real estate business. ( HLURB OR HUDCC)

non-profit entities

are taxable to income tax when they engage in a profit-oriented or commercial activity.

Ordinary gain

arises from the sale, exchange and other disposition including pacto de retro sales and other conditional sales of ordinary assets.

capital gains

general rule: regular income tax

capital gains

exception rule: capital gains tax

two types on capital gains subject to capital gains tax

capital gains on the sale of domestic stocks sold directly to buyer.

two types on capital gains subject to capital gains tax

capital gains on the sale of real properties not used in business.

gain on the sale, exchange and other disposiion of domestic stocks irectly to buyer

15% capital gains tax

gain on the sale, exchange and other disposiion of real property in the ph

6% capital gains tax

gains from other capital assets

regular tax

domestic stocks

ARE EVIDENCE OF OWNERSHIP OR RIGHTS TO OWNERSHIP IN A DOMESTIC CORPORATION REGARDLESS OF FEATURES

1. PREFERRED STOCKS

2. COMMON STOCKS

3. STOCK RIGHTS

4. STOCK OPTIONS

5. STOCK WARRANTS

6. UNIT OF PARTICIPATION IN ANY ASSOCIATION, RECREATION OR AMUSEMENT CLUB

CAPITAL GAINS

NOT COVER ONLY SALES OF DOMESTIC STOCKS FOR CASH BUT ALSO EXCHANGE OF DOMESTIC STOCKS IN KIND AND OTHER DISPOSITIONS.

CAPITAL GAINS

FORECLOSURE OF PROPERTY IN SETTLEMENT OF DEBT

CAPITAL GAINS

PACTO DE RETRO SALES

PACTO DE RETRO SALES

SALES WITH BUY BACK AGREEMENT

CONDITIONAL SALES

SALES WHICH WILL BE PERFECTED UPON COMPLETION OF CERTAIN SPECIFIED CONDITIONS

VOLUNTARY BUY BACK OF SHARES BY THE ISSUING CORPORATION

REDEMPTION shares which may be reissued and not intented for cancellation

the term other disposition does not include

issuance of stocks by a corporation

the term other disposition does not include

exchange of stocks for services

the term other disposition does not include

redemption of shares in a mutual fund

the term other disposition does not include

worthlessness of stocks

the term other disposition does not include

redemption of stocks for cancellation by the issuing corporation

the term other disposition does not include

gratuitous transfer of stocks

issue of stocks to stockholders

financing transactions rather than a sale transaction

excess of fv over the par

additional capital to corporation

treasury shares

cannot be considered assets or investments

treasure share premium

additional capital and is not income

treasure share premium

is not subject to capital gains tax

exchange of stocks for services

cannot be considered as exchange for property

redemption of shares in a mutual fund

gains from redemption of shares in a mutual fund are exempted by NIRC

WORTHLESS OF STOCKS

CAPITAL LOSS SUBJECT TO THE RULES OF REGULAR INCOME TAX

redemption of stocks by the issuing corporation

subject to regular income tax

gain by the investor on redemption of redeemable preferred shares

subject to regular income tax

gratuitous transfer of stocks donation inter-vivos or donation mortis causa

subject to transfer tax

stocks transferred for insufficient consideration r significant discount. The diff between fv and sp

subject to donors tax

modes of disposing domestic stocks

through the PSE

modes of disposing domestic stocks

DIRECTLY TO BUYER

SALE OF DOMESTIC STOCKS CLASSIFIED AS CAPITAL ASSETS THROUGH PSE

IS NOT SUBJECT TO CAPITAL GAINS TAX. IT IS SUBJECT TO A STOCK TRANSACTION TAX OF 60% OF1 % OF THE SP

SALE OF DOMESTIC STOCKS CLASSIFIED AS CAPITAL ASSETS THROUGH PSE

IT IS SUBJECT TO A STOCK TRANSACTION TAX OF 60% OF1 % OF THE SP

TRANSACTION TAX APPLIES ON THE SP REGARLESS OF THE EXISTENCE OF A GAIN OR LOSS ON THE SALE TRANSACTION

UNIVERSAL TAX

it applies to all taxpayers disposing stocks classified as capital assets regardless of classification of the taxpayer.

annual tax

it is imposed on the annual net gain on the sale of domestic stocks directly to buyer.

the documentary stamp tax

is deducted if paid by the seller.

selling price

case of cash sale, the total consideration received per deed of sale

If acquired by purchase, tax basis is the cost of the property

specific identification - SPECIFICALLY IDENTIFIED

moving average method- MAINTAINED BY THE SELLER WHERE TRANSACTION OF EVERY PARTICULAR

FIFO - CANNOT BE SPECIFICALLY IDENTIFIED

IF ACQUIRED BY DEVISE, BEQUEST OR INHERITANCE,

TAX BASIS IS THE FV AT THE TIME OF DEATH OF THE DECEDENT

IF ACQUIRED BY GIFT

TAX BASIS IS THE LOWER OF THE FVM AT THE TIME OF GIFT AND THE BASIS IN THE HANDS OF THE DONOR OR THE LAST PRECEDING OWNER BY WHOM IT WAS NOT ACQUIRED

IF ACQUIRED FOR INADEQUATE CONSIDERATION

TAX BASIS IS THE SUBSTITUTE BASIS OF STOCKS.

SPECIFIC IDENTIFICATION METHOD

IF NA IDENTIFIED ANG DATE NG PURCHASE, ADD ANG TOTAL COST THEN DEDUCT SA IBENTA NEXT MONTH OR WHAT THEN=

GAIN OR LOSS

CAPITAL TAX GAINS TAX RATE

15% FLAT RATE

SP-FV=

SUBJECT TO DONOR TAX

BASIS OF INCOME TAX

IS THE REALIZED GAIN

TRANSACTIONAL CAPITAL GAINS TAX

REGISTRABLE SECURITIES WHICH REQUIRES BIR TAX CLEARANCE PRIOR TO THEIR TRANSFER OF OWNERSHIP

ANNUAL CAPITAL GAINS TAX

THE 15% CAPITAL GAINS TAX IS AN ANNUAL TAX. the cgt is recomputed on the annual net gains and reported through a final consolidated return

no loss scenario

if no capital gains tax payable in the finl consolidated return. filling of BIR FORM 1707A MAY NOT EVEN NECESSARY.

INTRA-PERIOD LOSS CARRY-OVER PROCEDURE

NECESSARY TO AVOID OVERPAYING THE GOVERNMENT EVERY TIME THERE IS A GAIN AND SEEKING REFUNDS AT THE END OF THE YEAR FOR LOSSES INCURRED

ANNUAL CAPITAL GAINS TAX DUE- TOTAL TRANSACTIONAL CGT = CAPITAL GAINS TAX PAYABLE

sp-cost

subject to capital gains tax

for every sales transaction, the taxpayer shall file BIR Form 1707

true

inter-period carry-over

tax code does not allow carry over of capital loss to succeeding taxable year.

installment method

tax will be paid based on the pattern of collections of the contract price.

contract price

total sum of money collectible from the contract

installment method

collection/contract price x capital gains tax

contract price

is the selling price in the absence of any indebtedness shares sold

selling price

is used to measure the initial payment ratio

contract price

is used in determining the capital gains tax on installment

wash sales of securities

is deemed to occur when within 30days before and 30days after the losing sale of securities

wash sales

limitation on deductibility of capital losses on securities ( bonds, stocks, notes)

capital losses on wash sales

by non-dealers in securities are not deductible against capital gains because they are effectively unrealized.

substantialy identical

means stock or bonds of the same class with same features.

common stock

is not substantially identical to a preferred stock.

full replacement or full-cover-up

when the quantity of the shares acquired in the 61 day period is atleast equal to the quantity of the shares sold.

full replacement or full cover up

the loss shall be deferred and added to the tax basis of the replacement shares because the loss is a fake loss

specific identification shares brought is = same shares sold at a loss

capital loss is deductible against capital gains.

wash sales rule

intented to prevent taxpayers from feigning temporary losses which could enable them to manipulate their reportable taxable net gain

wash sales rule

is not applicable to dealers in securities as it is normal way of business for them to buy and sell stocks.

corporate reorganization

no gain or loss shall be recognized on a corporation or its stocks or securities such as corporation is a party to reorganization and exchanges.

reorganization

a corportation which is a party to a merger or consolidation, exchanges property solely for stocks in a corp which is a party to the merger or consolidation.

reorganization

acquisition by one corp in exchange solely for all or a part of its voting stocks, or in exchange solely for all or part of voting stocks of a corpo that has a control of such other corp whether or not such acquiring corp had control immediately.