Chapter 6: Self-Test Exercises
1. Discussion on Ordinary and Capital Assets
a. Ordinary Assets are classified as properties by business, corporations, and organization
that are used in trade or discourse of sale. Whereas Capital Asset is considered as
personal assets or any other assets that are not used in trade or any discourse of sale.
2. Two Types of Capital Assets that are Subject to Capital Gains Tax
a. These are Sale of domestic stocks sold directly buyers and real properties not used in
business, with both having capital gains.
3. Transactions considered as “Other Disposition” of Domestic Stock. Transactions not considered
as ‘Other Disposition”
a. “Other disposition” of domestic stock refers to non-ordinary transfers like selling stocks
outside the stock exchange, exchanging them for other assets, gifting, inheriting, or
redeeming/canceling them. Transactions not considered as other disposition include
regular market sales through the stock exchange, receiving stock dividends, or corporate
actions like stock splits or mergers where no gain is realized.
4. Tax Basis of Stocks from Purchase, Inheritance, Donation, Inadequate Consideration, and Tax-
Free Exchange
a. When you buy stocks, your basis is simply the amount you paid. If you inherit stocks,
your basis becomes their value on the date the owner died. If the stocks are donated,
your basis depends on whether donor’s tax was paid with donor’s tax, you use the fair
market value; without it, you use the donor’s old basis. If the stocks are sold for a very
low price, the law treats it partly as a sale and partly as a gift, so the basis follows gift
rules. In tax-free exchanges, the basis doesn’t reset—you just continue whatever basis
the previous owner had.
5. Methods of Costing Stocks
a. When figuring out the cost of the stocks you sold, the preferred method is identifying the
exact shares you sold and using their actual cost. If you can’t tell which shares were sold,
the law assumes you sold your oldest shares first (FIFO). If the shares are all mixed
together, like in pooled investments, then you use the average cost.
6. Compliance Requirements of the Two-Tiered CGT
a. If you sell shares through the stock exchange, the tax is automatically handled by the
broker, so you don’t file anything. But if you sell shares privately (not through the
exchange), you must file a capital gains tax return, pay the 15% CGT, and submit
documents like the deed of sale, proof of basis, and stock certificates.
7. Concept of a Wash Sale
a. A wash sale happens when someone sells a stock at a loss and then buys it back too
soon, usually within 30 days. The tax law doesn’t allow the loss to be deducted because
the person didn’t really leave the investment—they just tried to create a fake loss for tax
purposes.
8. Tax-Free Exchanges
a. A tax-free exchange happens when you transfer property like stocks to a corporation in
exchange for shares and you still end up controlling that corporation. Because you didn’t
actually cash out or profit, the law doesn’t tax the transaction, and your basis simply
carries over to the new shares
9. Criteria for Alternative Taxation to the 6% CGT
a. You only pay the 6% capital gains tax if the property is a capital asset. If the property is
actually used in business, it becomes an ordinary asset, and instead of CGT, it gets taxed
under regular income tax and possibly VAT. The tax depends on how the property is
used, not just what it is.
10. Exemption Requirements for 6% CGT
a. You can be exempt from paying the 6% CGT if you sell your principal residence and use
the full proceeds to buy or build another principal residence within the allowed period.
You must file a sworn declaration to the BIR and follow the requirements. If you don’t
reinvest everything, the part you didn’t use becomes taxable.
11. Nature of the 6% CGT
a. The 6% capital gains tax is a final tax on selling real property that is classified as a capital
asset. It is always based on the highest value—either the selling price, zonal value, or fair
market value. Once paid, you don’t need to include the gain in your regular income tax
return.
12. Taxpayers Covered by the 15% and 6% CGT
a. The 15% CGT applies to people and corporations that sell shares of stock not traded
through the stock exchange. The 6% CGT applies to anyone selling real property that is
considered a capital asset. The tax depends on what is being sold—stocks get 15% CGT,
real property gets 6% CGT.