Chapter 6 – Capital Gains Taxation

CHAPTER 6: SELF-TEST TAXATION

Discussion Questions:
1. What are ordinary assets and capital assets? Discuss.
2. Enumerate the two types of capital assets subject to capital gains tax.
3. What are the transactions considered as “other disposition” of domestic stocks?
What transactions are not considered as “other dispositions”?
4. Discuss the rules on tax basis of stocks acquired by purchase, inheritance, donation, for an
inadequate consideration, and under a tax-free exchange.
5. Enumerate the methods in costing stocks in order of priority.
6. Discuss the compliance requirements of the two-tiered capital gains tax.
7. Explain the concept of a wash sale.
8. Enumerate and discuss the tax-free exchanges.
9. What are the criteria of alterative taxation to the 6% capital gains tax?
10. Enumerate the exemption requirements to the 6% capital gains tax.
11. Discuss the nature of the 6% capital gains tax.
12. Compare the taxpayers covered by the 15% capital gains tax and the 6% capital gains tax.

True or False 1
1. A vacant and unused lot is an ordinary asset to a real estate dealer.
2. For taxpayers not engaged in business, assets shall cease to be ordinary assets when they are
discontinued from active use for more than two years.
3. Real and other properties acquired are ordinary assets to banks even if they are not engaged in the
realty business.
4. Capital assets will not become ordinary assets when used in business.
5. An ordinary asset becomes automatically become a capital asset when it is withdrawn from active
use.
6. The sale of real property capital assets will never be subject to regular income tax.
7. Donated assets become ordinary assets even if the done do not employ the same in business.
8. An ordinary asset continues to be an ordinary asset even if idled for more than two years if the
taxpayer is engaged in realty business.
9. The real properties used by exempt corporations in their exempt operations are capital assets.
10. Dealers in realties are subject to the regular tax on their sale of properties.
11. Capital gains from assets other than domestic stocks and real properties are subject to regular
income tax.
12. Dealers in securities are not subject to the stock transaction tax but are subject to the regular
income tax on gains realized upon the sale of stocks through the Philippine Stock Exchange.
13. Unit of participations in golf, polo, and similar clubs are considered domestic stocks.
14. The excess premium on the re-issuance of treasury stocks is subject to capital gains tax.
15. The issuance of shares of stock for property is subject to capital gains tax.
16. The sale of foreign stocks directly to a buyer is subject to capital gains tax.
17. The two-tiered final tax cannot apply unless and until there is a gain on the sale, exchange, and
other disposition of stocks directly to a buyer.
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18. The stock transaction tax on the sale of stocks through the PSE cannot apply unless there is a gain on
the transaction.
19. The 6% capital gains tax cannot apply unless there is a gain on the sale of real property.
20. The sale of real properties located abroad is subject to the 6% capital gains tax.

True or False 2

1. The annual capital gains tax return is simultaneously due with the annual regular income tax return.
2. The basis of properties received by way of inheritance is the basis in the hands of the last owner
who did not acquire the same by donation.
3. When specific identification is impossible, the cost of the stocks sold determined by the weighted
average method.
4. The basis of the stocks received in tax-free exchanges is the basis of the shares given.
5. The transactional capital gains tax is required to be filed within 30 days from the date of sale.
6. The gain on the sale of stocks for stocks pursuant to a plan of merger and consolidation is exempt if
it resulted in the transferor acquiring corporate control over the absorbed corporation.
7. Installment payment of capital gains tax is allowed if the ratio of downpayment over the selling price
of the sale does not exceed 25%.
8. The selling price is used to determine the propriety of using the installment method but the contract
price is used to determine the capital gains tax payable in installment.
9. The excess of mortgage over the basis assumed by the buyer constitutes an indirect receipt which is
part of the initial payment and the selling price.
10. Wash sales occur when there is a repurchase of shares within 30 days before and 30 days after the
date of disposal of securities at a loss.
11. Control means more than 50% ownership in the voting power of a corporation.
12. The sale of delisted stock is subject to stock transaction tax and not to capital gains tax.
13. Gain and loss in a share-for-share swap pursuant to a plan of merger or consolidation shall be
recognized up to the extent of the cash and other properties received.
14. The sale by the National Housing Authority of commercial lots is subject to capital gains tax.
15. If the assessor’s fair value is lower than the selling price, then the fair value of the property is the
zonal value.
16. Title to a property shall not be registered by the Registered of Deeds unless the Commissioner or his
representatives has certified that the tax on the transfer has been paid.
17. Domestic corporations are exempt from capital gains tax on the sale, exchange, and other
disposition of real properties.
18. The sale of land pursuant to the Agrarian Reform Program is exempt from capital gains tax.
19. Foreign corporations are required to pay capital gains tax on the sale of domestic stocks and on the
sale of real property capital assets.
20. The alternative taxation on an expropriation sale is not applicable to corporate taxpayers.
Chapter 6 – Capital Gains Taxation

CHAPTER 6: SELF-TEST TAXATION

Multiple Choice – Theory: Part 1

1. Which is an ordinary asset?

a. Personal car c. Principal residence of the taxpayer
b. Delivery truck d. Wedding ring of the taxpayer

2. Which is not an ordinary asset?

a. Personal laptop of the taxpayer c. Real property held for sale
b. Machineries and equipment d. Leasehold improvements

3. Which is a capital asset to a realty developer?

a. Construction equipment c. Vacant lot held for future development
b. Domestic stocks d. Head office building of the developer

4. Which is an ordinary asset?

a. Home appliances c. Personal cellphone
b. Personal car d. Office supplies

5. Which of the following asset, if not used in business, is subject to regular tax?
a. Real property c. Domestic stock option
b. Domestic stock rights d. Taxpayer’s personal car

6. Which is a capital asset for a security dealer?

a. Domestic stocks c. Real property held speculation
b. Domestic bonds d. Office equipment

7. Which is subject to the 5%-10% capital gains tax?

a. Sale of domestic stocks directly to a buyer within or outside the Philippines
b. Sale of domestic bonds directly to a buyer within the Philippines
c. Sale of domestic stocks through the Philippine Stock Exchange
d. All of the above

8. Who is not subject to capital gains tax on the sale of domestic stocks directly to a buyer?
a. Dealer of cars c. Dealer of securities
b. Real property developer d. Realty dealer

9. Which of the following, when sold, is not subject to capital gains tax?
a. Boarding house c. House and lot
b. Warehouse d. A and B
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CHAPTER 6: SELF-TEST TAXATION

10. Which is not subject to the 6% capital gains tax?

a. Donation of property
b. Foreclosure of a mortgaged property
c. Expropriation of one’s property in favor of the government
d. Sale of property for an insufficient consideration

11. Statement 1: Capital gains may arise from sale, exchange, and other disposition of movable
properties used in business.
Statement 2: Ordinary gains may arise from sale, exchange, and other disposition of real properties
not used in business.

Which is true?
a. Statement 1 is correct. c. Both statements are false.
b. Statement 2 is correct. d. Both statements are correct.

12. Statement 1: The gain on sale of domestic stocks directly to a buyer is presumed.
Statement 2: The gain on sale of real properties is presumed.

Which of the following correct?

a. Both statements are true. c. Only statement 1 is true.
b. Both statements are false. d. Only statement 2 is true.

13. Which of the following properties when sold may be subject to capital gains tax?
a. Domestic stock c. Patent
b. Foreign stocks d. Office buildings

14. Statement 1: Only depreciable assets of business qualifies as ordinary assets.

Statement 2: Land used in business is a capital asset since it is not subject to depreciation.

Which of the following correct?

a. Statement 1 is false. c. Both statements are false.
b. Statement 2 is false. d. A, B and C

15. Statement 1: Ordinary gains may arise from sale, exchange, and other dispositions of real properties
used in business.
Statement 2: Capital gain may arise from sale, exchange, and other dispositions of real properties
not used in business.

Which is false?
a. Statement 1 is correct. c. Both statements are false.
b. Statement 2 is correct. d. Both statements are correct.
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CHAPTER 6: SELF-TEST TAXATION

Multiple Choice – Theory: Part 2

1. Which of the following properties, when sold, may be covered by regular income tax?
a. Share options c. Share warrants
b. Preferred stocks d. Promissory notes

2. Which of the following assets may be subject to capital gains tax upon disposal?
a. Share options c. Share warrants
b. Preferred stocks d. Promissory notes

3. The sale of an office building will be subject to

a. 60% of 1% percentage tax. c. 15% capital gains tax.
b. 6% capital gains tax. d. regular tax.

4. The term “other disposition” covers

a. Foreclosure sales c. Expropriation by the government
b. Auction sale d. Any of these

5. Which of the following sales of domestic stocks is subject to capital gains tax?
a. Sale of domestic stocks through the PSE
b. Issue of domestic stocks to subscribers
c. Sale of domestic stocks directly to a buyer
d. Exchange of stocks for stocks in a corporate merger

6. The sale of listed shares will never be subjected to

a. 6% capital gains tax c. 15% capital gains tax
b. 60% of 1% percentage tax d. Any of these

7. The sale of non-listed shares may be subjected to

a. 6% capital gains tax only. c. 15% capital gains tax only.
b. 60% of 1% percentage only. d. Any of these

8. Which of the following when sold may be exempted from the 6% capital gains tax?
a. Unused land to the government c. Developed residential properties for sale
b. Residential lot d. Principal residence

9. Statement 1: The sale of exchange must result to an actual gain before the 15% capital gains tax is
imposed.
Statement 2: The sale or exchange must result to an actual gain before the 6% capital gains tax is
imposed.
a. Both statements are correct c. Only statement 1 is correct
b. Both statements are incorrect d. Only statement 2 is correct
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CHAPTER 6: SELF-TEST TAXATION

10. When the annualized capital gains tax exceeds the transactional capital gains tax, the excess is a
a. Tax credit c. Tax refundable
b. Tax payable d. A or B

11. 1st statement: Properties acquired by real estate dealers are ordinary assets.
2nd statement: Properties of real estate dealers continue to be classified as ordinary assets even if
they change the nature of their business.
a. First statement is correct c. Neither statement is correct
b. Second statement is correct d. Both statements are correct

12. 1st statement: When realty businesses discontinue use of assets for more than two years, the same
shall be reclassified as capital assets.
a. First statement is correct c. Neither statement is correct
b. Second statement is correct d. Both statements are correct

13. Which is an incorrect statement?

a. The capital gains tax on the disposition of capital stock presumes the existence of gain on the
sales transaction.
b. The buyer of real property capital asset shall withhold the tax at source and remit the same to
the government.
c. Capital gains tax is identified under the NIRC as a form of final tax.
d. The capital gains tax on the disposition of real property presumes the existence of gain on the
sales transaction.

14. Which of these shall pay the two-tiered capital gains tax?
a. A real property developer c. A merchandiser or trader of goods
b. A dealer in stocks d. A or B

15. The sale of real properties which would otherwise be subject to the 6% capital gains tax may
nevertheless be subject to regular income tax if all of the following conditions are met, except one.
Which is the exception?
a. the seller must be an individual taxpayer
b. the sale involves the principal residence of the taxpayer
c. the buyer is the government
d. the taxpayer opted to be subjected to regular tax

16. Which of these pay the 6% capital gains tax?

a. Security dealer c. Real property developer
b. Real property dealer d. None of these
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CHAPTER 6: SELF-TEST TAXATION

17. The sale of a principal residence is exempt from the capital gains tax if all of the following conditions
are met, except
a. The proceeds is fully utilized in acquiring a new principal residence.
b. The reacquisition must be by purchase.
c. The reacquisition must have been made within 18 months from the date of sale.
d. The capital gains tax must be deposited in escrow.

Multiple Choice – Theory: Part 3

1. The transactional 15% capital gains tax is to be paid.

a. Within 30 days from the date of sale or exchange.
b. Within 30 days from the end of month of sale.
c. On the 15th day of the fourth month following to close of the quarter when the sale was made.
d. On the 15th day of the fourth month following the taxpayer’s year-end.

2. The annual 15% capital gains tax return is due

a. within 30 days from the end of month of sale.
b. within 30 days from the date of sale or exchange.
c. on or before the 15th day of the fourth month following the taxpayer’s year-end.
d. on or before the 15th day of the fourth month following the close of the quarter when the sale
was made

3. Capital gains tax that is not payable on installment basis is due

a. within 30 days from the date of sale or exchange.
b. within 30 days from the end of month of sale.
c. on or before the 15th day of the fourth month following the close of the quarter when the sale
was made.
d. on or before the 15th day of the fourth month following the taxpayer’s year-end.

4. Installment payments of the 6% capital gains tax is due

a. Within 10 days from the date of each installment payment.
b. Within 30 days from the date of each installment payment.
c. Within 15 days from the date of each installment payment.
d. Within 20 days from the date of each installment payment.

5. The installment payment of capital gains tax is applicable to the

a. 15% capital gains tax only
b. 6% capital gains tax only
c. Both A and B
d. Neither A nor B
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CHAPTER 6: SELF-TEST TAXATION

6. The installment payment of capital gains tax is applicable to

a. Individual taxpayers only c. Dealers in properties only
b. Corporate taxpayers only d. A or B
7. Which of these capital gains is subject to capital gains tax?
a. Gain on the sale of stock rights
b. Gain on sale of interest in a professional partnership
c. Gains on the sale of derivative financial instruments linked to commodity prices
d. Gain on sale of bonds
8. Paulo indicated in his return his intent to avail of the exemption from the 6% capital gains tax. Under
what condition will he be exempted?
a. When the proceeds of the sale exceeds the cost basis of the property sold
b. When the proceeds of the sale exceeds the acquisition price of the new residence
c. When the cost basis of the property sold exceeds its selling price
d. When the acquisition price of the new property exceeds the proceeds of the old property sold

9. Partial taxation under the 6% capital gains tax will result when
a. The proceeds from the sale of the old property exceeds both its cost and the acquisition price of
the new property.
b. The proceeds of the sale exceeds its zonal value and Assessor’s fair value.
c. The proceeds of the old property exceeds the acquisition price of the new property regardless of
the tax basis, zonal value, and Assessor’s fair value of the old property.
d. The zonal value is greater than the sales proceeds of the old property.

10. The transactional capital gains tax on domestic stocks is

a. not a final tax.
b. included in the income tax return.
c. creditable to the regular income tax.
d. creditable to the annual capital gains tax due.

11. The 15% capital gains tax does not apply to

a. Resident citizen dealers of stocks
b. Non-resident citizen dealers of cars
c. Resident alien dealers of computer parts
d. Domestic corporations dealing in real properties

12. The documentary stamp tax on the sale of domestic stocks directly to a buyer is based on
a. Selling price c. Fair Value
b. Par value d. Cost

13. The documentary stamp on the sale of real property is based on

a. Selling price c. Cost
b. Fair value d. A or B, whichever is higher
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CHAPTER 6: SELF-TEST TAXATION

14. The 6% capital gains tax does not apply to

a. Domestic corporations c. Non-resident citizens
b. Resident aliens d. Foreign corporations

15. Who shall file the capital gains tax return for the sale, exchange, and other disposition of real
property?
a. Seller c. Transfer agent
b. Buyer d. The registry of deeds