MODULE 5 UNIT 2

TAXABLE CAPITAL GAINS

Capital assets transactions resulting to gains will be taxable if not among those which are mentioned in the
Tax Code as tax exempt.

Taxable capital gains which are not subject to final tax is returnable in 1701 0r 1702 and subject to normal
income tax rate.
CAPITAL ASSETS TRANSACTIONS THAT ARE SUBJECT TO FINAL TAX:
 6% of the selling price or of the zonal value which ever is higher on the Sale of real property (capital asset)
located within the Philippines;

 15% on capital gain on sale of equity securities not traded inside the stock exchange.

INSTALLMENT PAYMENT OF FINAL CAPITAL GAIN TAX

 The sale is more than P1,000
 Initial payment is not more than 25% of the selling price
 For sale of real property, initial payment includes the excess of mortgage assumed over the cost of sale.
 Installment tax payable = (collection/contract price) X total tax due
 Contract price is Selling price – lower of cost or mortgage assumed
APPLICATION
The real property located in the Philippines which is not used in conduct of business was sold for P1,000,000, when
the zonal value was P1,200,000.
The cost to the owner, P500,000.
Terms:
 P600,000 unpaid mortgage to be assumed by the buyer.
 The balance is payable in 4 annual installments of P100,000/year starting year end of sale.
How much is the total capital gain tax on the sale?

ANSWER, 1,200,000 x 6% = P720,000 (note the higher amount of zonal value was used as tax based, not the selling price)
How much is considered as initial payment in the year of sale?
ANSWER, P100,000 + ( 600,000- 500,000) = P200,000 (note the excess of mortgage assumed over the cost is part of the
initial payment )

Is the P720,000 capital gain tax be allowed to be paid on installment?

ANSWER, Bearing of initial payment over the selling price is, 200,000/1,000,000 = 20%,
Since the initial payment is not more than 25% of the selling price, then installment payment of P720,000 is allowed.
How much is considered as the contract price?

ANSWER. Contract price, 1,000,000 – 500,000 = P500,000

How much is the required first installment payment of capital gain tax ?
ANSWER. (Initial payment of 200,000/contract price of P500,000) x 720,000 = P288,000
APPLICATION
The investment in equity securities with carrying cost of P1,000,000 were sold for P1,200,000.
Terms, installment:
20% payable in year of sale , balance in two equal annual installments ,

How much is the tax liability if transacted inside stock exchange?

ANSWER, Exempt from capital gain tax but to be withheld with transaction tax of P1,200,000 x .006=7,200
Note that the 6/10 of 1% or .006 of selling price is a business tax, not income tax
The capital gain of P200,000 is exempt from capital gain tax because it is transacted inside stock exchange

How much is the tax liability if sold over the counter (not transacted inside the stock exchange) ?
ANSWER, The tax liability is capital gain tax of 15% on the capital gain,
15% x (1,200,000 – 1,000,000) = P30,000

If transacted OUTSIDE stock exchange (0ver the counter) and opted for installment payment of tax, how much is the first
installment payment of capital tax due?

ANSWER, Capital gain tax = 15% x (1,200,000 – 1,000,000) = P30,000

x 20% collection in year of sale
Installment payment of tax due in year of sale = P 6,000
FINAL CAPITAL GAIN TAX RETURNS:
BIR Form No. 1706 Capital Gains Tax Return for Onerous Transfer of Real Property Classified as Capital Asset (both
Taxable and Exempt)

Filed within thirty (30) days following each sale, exchange or disposition of real property

- In case of installment sale, the return shall be filed within thirty (30) days following the receipt of the 1st dow npayment and
within thirty (30) days following each subsequent installment payment

- One return is filed for every transfer document regardless of the number of each property sold, exchanged or disposed of

BIR Form No. 1707 Capital Gains Tax Return for Onerous Transfer of Shares of Stocks Not Traded Through the
Local Stock Exchange.
Filed within thirty (30) days after each cash sale, barter, exchange or other disposition of shares of stock not traded through
the local stock exchange.

- In case of installment sale, the return shall be filed within thirty (30) days following the receipt of the first down payment
and within (30) days following each subsequent installment payment.

BIR Form No. 1707-A Annual Capital Gains Tax Return for Onerous Transfer of Shares of Stock Not Traded Through the Local
Stock Exchange
 For individual taxpayers, this final consolidated return is filed on or before April 15 of each year covering all stock
transactions of the preceding taxable year.

- For corporate taxpayers, this form is filed on or before the fifteenth (15th) day of the fourth (4th) month following the
close of the taxable year covering all transactions of the preceding taxable year.
CAPITAL GAIN SUBJECT TO NORMAL TAX
Capital gain which are not tax exempt and which not collected with final tax are Returnable in 1701 of individual taxpayer or
in 1702 of corporation.
Total capital gain (capital asset transaction) Pxxxx
Less: Exempt from Capital Gain tax xxxx
Taxable Capital asset transaction Pxxxx
Less: Subject to Final Capital Gain Tax xxxx
= Returnable Income subject to normal tax P xxxx in 1701 or in 1702

APPLICATION
The following capital asset transactions of X transpired during taxable year:
 Sale of investment in securities traded inside the stock exchange at gain of P500,000 Exempt from Capital Gain Tax

 P200,000 Gain from redemption of investment in mutual fund Exempt from Capital Gain Tax

 Sale of idle lot for P1,000,000 at gain of P300,000 Final tax of 6% x 1,000,000 = 60,000

 Sale of family car at gain of P50,000 Returnable in 1701 or 1702

 Sale of personal jewelry at gain of P450,000 Returnable in 1701 or 1702

The capital gain that are subject to normal tax is returnable along with returnable compensation
income and business income in 1701 of individual or in 1702 of corporation.
RULES ON RETURNABLE CAPITAL ASSET TRANSACTIONS SUBJECT TO NORMAL TAX

Capital gain/loss = Selling price – cost

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.

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.

RULES in reporting taxable capital assets transactions in 1701 or 1702

 Net capital gain is added to ordinary income
 Net capital loss is not deductible from ordinary income
 Ordinary loss is deductible from net capital gain

RULES in reporting taxable capital assets transactions in 1701

 For individual taxpayer;
• If the capital asset is held for more than 12 months, only 50% of the capital gain/loss is returnable;
• net capital loss carry over (in an amount not in excess of the net income for such year) shall be
treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for
not more than twelve (12) months.
APPLICATION ( the capital assets transactions are returnable in 1701 of individual)

For the two taxable years, the following income and losses were reported by the resident citizen taxpayer:

Year 1 Year 2
Gross business income/(loss) 50,000 (10,000)
Capital gain from property held for 2 years 120,000 140,000
Capital loss from property held for 6 months (120,000)

How should the 1701 tax return for year 1 be accomplished?

Year 1, 1701:
Business income (ordinary ) 50,000
Returnable capital asset transactions:
capital gain, 120,000 x 50% 60,000 More than 12 months, 50% only
capital loss (120,000) Less than 12 months,100% only
Net capital loss ( not deductible from ordinary income) (60,000)
Combined income subject to normal tax rate 50,000
How should the 1701 tax return for year 2 be accomplished?
Year 2
Business loss (ordinary ) (10,000)
Returnable assets transactions: Deductible from net capital gain
capital gain, 140,000 x 50% 70,000
Net capital loss carry over from yr 1 ( 50,000)
Net capital gain 20,000 Carrry over up to the amount of ordinary income
Combined income subject to normal tax rate 10,000 when such net capital loss was incurred