University of Southern Philippines Foundation

College of Accountancy

TAXATION
Income Tax (Capital Assets and Capital Gains and Losses)

1. Capital Assets
a. Meaning of capital assets The term “capital assets” means property held by the taxpayer whether or not
connected with his trade or business.
b. Not included in capital The term does not include the following (hence ordinary assets):
assets a. Stock in trade;
b. Property of a kind which would be included in inventory of the taxpayer if on hand at
the close of the taxable year;
c. Property held by the taxpayer primarily for sale to customers in the ordinary course
of trade or business;
d. Personal property used in the trade or business which is subject to allowance for
depreciation;
e. Real property used in business.

Problems
1. Lots being rented when subsequently sold are classified as:
a. Capital assets d Fixed assets
b. Liquid assets c. Ordinary assets
2. The term "capital assets" includes:
a. Stock in trade or other property included in the taxpayer's inventory.
b. Real property not use in the trade or business of taxpayer.
c. Property primarily for sale to customers in the
ordinary course of trade or business.
d. Property used In trade or business subject to depreciation.
3. Winston operates a retail store and owns the following property. Indicate which of the properties is capital asset in
the hands of Winston:
a. The building which houses the retail store
b. Inventory on hand at the end of the year
c. Fixtures used in the retail store
d. Trade accounts receivable
4. One of the following is not a capital asset:
a. Stock investment
b. Liquidating dividend
c. Interest of a partner in a partnership
d. Machine with useful life of 10 years used in business

2. Terms Associated with Capital Assets

a. Net capital gain The excess of capital gain over capital loss.
b. Net capital loss The excess of capital loss over capital gain.
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. Summary of Important Points

Taxpayers other than corporations Corporations
a. Short term capital gain or
loss (capital asset has
been held for not more 100% 100%
than 12 months)
b. Long term capital gain or
loss(capital asset has
been held for more than 50% 100%
12 months)
c. Limitation on deduction Capital losses shall be allowed only to the Capital losses shall be allowed only to
of capital losses extent of capital gains. the extent of capital gains.
d. Net capital loss carry over Net capital loss is carried over to the Capital loss carry over is not allowed.
succeeding year as a short term loss (100%).

Amount to be carried over is the lower

between the net capital loss and net income
in the year the loss was sustained.

5. A feature of ordinary gains as distinguished from capital gains:

a. Gains from sales of assets not stock in trade.
b. May or may not be taxable in full.
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c. Sources are capital assets.
d. No holding period.
6. Individual, single, has the following records:
Net income from business P140,000
Sales of assets:
Gain, sale of ordinary asset held for 5 years 30,000

Gain, sale of capital asset held for 6 years 40,000

Loss, sale of capital asset held for 9 months 60,000

The taxable income of the taxpayer is:
7. In addition to his business as construct& materials dealer. Henry had the following capital assets transactions in
2015:
Jewelry Tesla Car Television Ford Car
Date sold 3/15/2015 5/16/2015 9/5/2015 12/5/2015

Selling price 80,000 400,000 6,000 12,000

Date Acquired 5/10/2012 7/15/2013 2/9/2015 1/10/2015

Acquisition cost 10,000 350,000 5,000 20,500

Selling expense 1,000 20,000 - -

The net capital gain of Henry in 2015 is:

4. Sale of SHARES OF STOCK (Not Traded)

a. Shares of stock 1. shares of stock of a corporation
2. warrants and/or options to purchase shares of stock
3. units of participation in a partnership (except GPP), joint stock companies, joint
accounts, joint venture taxable as corporation, associations, and recreation or
amusement clubs (such as golf, polo or similar clubs) and
4. mutual fund certificates

b. Transactions subject Shares of stock of domestic corporations which are not traded in the stock
exchange (directly to buyer or over-the-counter).
Tax Rate: Not over P100,000 5%
Amount in excess of P100,000 10%
c. Filing of return and Within 30 days after each transaction
payment of tax Consolidated return of all the transactions during the taxable year shall be filed on or
before the 15 th day of the 4th month following the nose of the taxable year.
Problem
Olive, resident citizen, has the following transactions of not listed and traded shares of stocks of a domestic
corporation in 2016:
Date of Selling
Sale Acquisition Cost Price
3-Jan 8-Apr-13 P 85,000 P185,000
15-Mar 30-Sep-12 256,000 360,000
12-Aug 23-Sep-12 175,000 115,000
8. The capital gains tax on the January 3, 2016 sale
9. The capital gains tax on March 15, 2016 sale
10. The capital gains tax(refund) on the August 12, 2016 sale
11. The final capital gains tax/refund at the end of the year is:

5. Sale of REAL PROPERTY - Capital Assets

The following who are engaged in sale, exchange or other disposition of
a. Who are subject?
real property in the Philippines classified as capital assets, including
pacto de retro sales, arid other forms of conditional sales by:

a. Individual, estate or trust

b. Domestic corporation on lands and/or buildings which are not actually
used in business (if the real property is other than Land
and/buildings, it shall be subject to 30% tax rate).
c. R esi dent fo r ei gn cor po r at io n - su bj ec t t o cr edit a bl e withholding
tax and ordinary income tax
d. Nonresident foreign corporation - subject to 30% FWT
b. Rate and Base
6% of gross selling price, FMV or zonal value, whichever is the highest.
c. Filing/Payment
Within 30 d a y s f r o m t h e d a t e o f notarization of the deed of sale.

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12. Panda is not engaged in Teal estate business. He sold a 1,000 square mater residential land for P300,000 on
March 15, 2015. The land was acquired by purchase on March 5, 2013 for P120,000. After acquisition,
the land was fenced at e cost of P30.000. A commission of 5% of the sales price was paid to the broker.
How much is the capital gains tax due?
13. Heredera inherited from her parents large parcel of undeveloped land acquired several years ago at a cost
of P500,000. Heredera now sells all of these parcels for P1.5 million. Should a gain on sale be reported for
income tax purposes?
a. No to both questions because each sale is subject to final tax
b. Y e s t o b o t h q u e s t i o n s b e c a u s e b o t h a r e considered ordinary income.
c. No to 1st question because the sale is subject to final tax; Yes to 2 nd question because the real property is
considered as an ordinary asset.
d. Yes to 1st question because the inherited property is an ordinary asset; No to 2nd question because the
developed property is a capital asset.
Items 14 - 16:
Cruz, married with six dependent children show the following:
2015 2016
Gross business income P200,000 P300,000
Expenses 90000 100,000
Net income 110,000 200,000

Sale of Capital Assets (personal property):

Asset 4
Asset 1 Asset 2 Asset 3
P130,000
Cost P20,000 P200,000 P100,000 P130,000

Selling price 60,000 45,000 450,000 80,000

Date acquired 1/10/2013 5/9/2014 8/19/2013 9/21/2016
Date of sale 3/31/2015 4/27/2015 7/23/2016 12/17/2016

Sale of other assets:

Stocks (not
Vacant Lot Apartment Stocks (traded) traded)
Selling price 2,000,000 1,200,000 220,000 150,000
Market value 1,900,000 1,450,000 220,000 145,000
Cost 500,000 1000000 200,000 30,000
Book value - 600,000 - -
Agent's commission 200,000 120,000 5,000 3,200

Date acquired 11/18/2015 1/21/2011 2/13/2015 -

Date sold 7/10/2015 6/20/2016 4/17/2016 9/30/2016

14. The taxable income in 2015 and 2016

15. The total final taxes in 2015 and 2016

16. The income tax due in 2015 and 2016 if the taxpayer is a domestic corporation

17. A resident citizen who is married, had the following data during the year:
Gross sales P400,000
Capital gain on sale of asset held for 10 months 10,000
Dividend from resident foreign corp 15,000
Cost of goods sold 100,000
Capital loss on sale of asset held for 6 months 5,000
Operating expenses 20,000
If the taxpayer chose the optional standard deduction, the taxable income is:
d. Sale in favor of the If the property is sold or disposed in favor of go v e r n m en t o r a n y o f
government i t s po l i t i c a l su b di v i s i o n s o r a g en c i e s o r t h e G O C C s, t h e t a x p a y e r
may:
1. P a y t h e t a x b a s ed o n t h i s r u l e ( 6 % C G T ) , o r
2. T o i n c l u d e t h e ga i n i n h i s g r o ss i n c o m e su b j ec t t o gr a d u a t ed
rates of tax.
e. Sale of principal residence 1. Principal residence - refers to the dwelling house, including the land on which it
is situated, where the husband and wife or an unmarried individual, whether or
not qualified as head of family, and members of his family reside.
2. Rate and Base – 6% of selling price or fair market value (zonal value or
assessor's value), whichever is higher.
3. Exemption from tax - If the proceeds of sale shall be utilized in acquiring new
residence within 18 calendar months from the date of sale.
Conditions:
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a. The Commissioner shall have been duly notified by the taxpayer within 30 days from
the date of sale or disposition through Form 1706 or "Sworn Declaration of Intent" of his
intention to avail of the Exemption.
b. Said tax exemption can be availed of only once in every 10 years.
c. The 6% capital gains tax due on the presumed capital gains shall be deposited in
interest bearing account with an authorized bank under Escrow Agreement.
4. Proceeds of sale not fully utilized- if the proceeds of sale is not fully utilized in the
purchase or construction of a new residence, the portion of the gain presumed to
have been realized on the sale shall be subject to tax. The taxable portion shall
be computed as follows:
Unutilized amount
X Higher of GSP & FMV
Gross selling Price
Problems
Items 18 - 19:
Samson sold his residential house to Delilah for P5,000,000. Its FMV when he inherited was P6,000,000 although its present
FMV is P8,000,000.
18. The tax on the above transaction is:
19. Assuming the residential house is located abroad, the capital gains tax is.
Items 20-23:
On February 4, 2015. Mango sold for P6,500,000 a residential lot with an assessor's value of P6,000,000 and zonal value of
P6,200,000. Payment was made on February 5 but the deed of absolute sale was notarized February 6.
20. How much is the capital gains tax?
21. When is the deadline for payment of the capital gains tax without any penalty?
22. How much is the documentary stamp tax on the transaction?
Items 24-29:
On August 15, 2014, Andy sold a 50 square meter residential condominium unit for P3,000,000. The condo unit was acquired
in 2008 for P1,800,000. On the date of sale, the fair market value of the unit as shown in the real property declaration is
P2,500,000 and the assessed value amounts to P500,000. The zonal value on the condo unit is P70,000 per square meter.
24. The capital gains tax is:
25. The capital gains tax of Andy if the proceeds of sale shall be utilized in acquiring a new residence is:
26. In item 24 the basis of the new residence is:
27. The amount to be deposited in escrow if the proceeds of the sale shall be utilized in acquiring a new residence is:
28, The capital gains tax payable assuming that Andy will utilize only P2,000,000 of the proceeds in acquiring a new residence:
29. In item 28, the basis of the new residence is:
30. A resident citizen has the following records of transactions in 2014:
Capital gains (short-term) on sale of:
Domestic shares listed and traded in the local stock exchange 22,400
Vacant lot, through a broker, located in Baguio City (FMV-P700,000) 150,000
Residential house in Singapore 300,000
Capital loss (long-term) on sale of:
Land in New York City 125,000
Family car 50,000
The net capital gain/(loss) of the resident citizen is:

6. 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
31. Calendar year is 2015:
Taxpayer is a citizen of the Philippines who is single.
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Capital gain on sale of bonds held for 20 months 50,000
Capital gain on sale of not traded shares of domestic corporation held for 6 months 120,000
Capital loss on sale of family car held for 11 months 80,000
Capital loss on sale of land in the Philippines held for 3 years on a selling price of P800,000 60,000
Net capital loss in 2014 (net income of the year was P10,000) 20,000
Total capital gains to consider at the end of the year:
32. Basa bought shares of stock on October 31, 2014 for P10,000 as investment. On October 31, 2015 the
shares became worthless. For tax purposes
a. Basa sustained a long term capital loss.
b. Basa sustained a short term capital loss.
c. Basa sustained an ordinary loss.
d. Basa did not sustain any loss.
33. A Co. had investments in shares of stock of B Co. that it acquired at a cost of P20,000. It also
had investments in shares of stock of C Co. that it acquired at a cost of P40,000. The value of the
shares of stock of B Co. had decreased to P15,000, while the shares of stock of C Co. are now
worthless, and had to be written off. The deductible capital loss is:
Items 34-35:
Martin has the following data in 2015:
Sale of Property Holding Period Gain/Loss
Apartment house 10 years 35,000
Residential house 6 years 120,000
Vacant lot 12 years 72,500
Jewelry-personal use 6 months 4,200
Jewelry in jewelry store 2 months 8,000
Car for personal use 4 years (20,000)
Transportaion equipment 12 months (10,000)

The proceeds from sale of residential house shall be used in acquiring a new residence. During the year, Martin had a net
income (other than the sale of the properties above) in the amount of P5,000.
34. The taxable income before personal exemption of Martin in 2015 is:
35. Assuming the net income of Martin in 2016 is P130,000 which includes a capital gain of P6,000. The
taxable income before personal exemption of Martin in 2016 is:

7. WASH SALES / SHORT SALES

1. Wash sale sale of securities where substantially identical securities (the same in all important
particulars) are acquired or purchased within a 61-day period beginning 30 days before the
sale and ending 30 days after the sale.
2. Treatment a. Gains on wash sales - taxable gains
b. Losses from wash sales-not deductible losses

3. The wash sales a.Individuals or corporations acting as dealers in stocks or securities if

provisions do not the sale or disposition is made in the ordinary course of trade or
apply to: business.
b.Short sale transactions - is a sale of stock which the seller does not
own (he merely borrows the stock certificate through or from his
broker) and subsequently buys or covers the stock to complete the
transaction.
36. Miss Michelle has the following transactions on substantially identical stocks .
Date Purchases (100 shares)
3/20/2014 Price, P 20,000
4/18/2014 18,000
2/28/2015 18,500

Sales (100 shares)

5/7/2014 3/20/2014 purchase, 17,500
1/20/2015 4/18/2014 purchase, 17,000

Compute the loss in 2014 and 2015 and indicate whether it is deductible or not.

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