C. CAPITAL GAINS AND LOSSES 1. The concept of ordinary assets.
Ordinary assets are: 1) Stock in trade of the taxpayer or other properties of a kind which would properly be included in the inventory of the taxpayer 2) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. 3) Property used in the trade or business and subject to depreciation 4) Real property used in trade or business 2. The concept of capital assets.
Capital Assets include all property held by the taxpayer whether or not connected in trade or business but not including those enumerated above as ordinary assets. 3. The importance of knowing whether an asset is capital or ordinary.
It is important to determine the correct classification of an asset on account of the preferential tax treatment given to gains or losses from sales or exchanges of capital assets which does not apply to the gains or losses from sales or exchanges of ordinary assets. 4. Capital gain * It is the gain derived from the sales or exchange of capital assets. 5. Capital loss * It is the loss incurred from the sale or exchange of capital assets. 6. Net Capital Gain * It is the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. 7. Net Capital Loss * It is the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges. 8. Net Capital Loss Carry Over * It is the net capital loss in a taxable year which cannot be deducted from ordinary income but which could be carried over to the next taxable year by a taxpayer other than a corporation as a deduction against net capital gain up to an amount not in excess of the taxable income. 9. Short-term capital gain or loss * It is the gain or loss arising from the sale or exchange of capital asset help for 12 months or less. 10. Long-term capital gain or loss * It is the gain or loss arising from sale or exchange of capital asset held for more than 12 months. 11. Ordinary Income * It is the excess of income over expenses and losses of a taxpayer excluding capital gains and capital losses.

12. Ordinary Gain * It is the gain derived from the sale or exchange of ordinary assets. 13. Ordinary Loss * It is the excess of the expenses or losses over the income of the taxpayer excluding capital gains and capital losses; or the loss incurred from the sale or exchange of ordinary assets.

14. The Requisites for the recognition of capital gain or loss 1. The transaction must involve property classified as capital assets; and 2. The transaction must be a sale or exchange or one considered as equivalent to a sale or exchange. 15. Kinds of Capital Assets 1. Short-term one which has been held by the individual taxpayer for 12 months or less 2. Long-term one which has been held by the individual taxpayer for more than 12 months 16. The rules on the Recognition of Capital Gains or losses from the disposition of personal property classified as capital asset where the taxpayer is an individual 1. The percentages of gain or loss to be taken into account shall be the following: a. 100% if the capital asset has been held 12 months or less b. 50% if the capital asset has been held for more than 12 months 2. Capital losses shall be deducted only to the extent of the capital gains; hence, the net capital loss is not deductible 3. Ordinary losses are deductible from capital gains but net capital loss cannot be deducted from ordinary gain or income 4. There is a “net capital loss carryover” 17. Is there an exception to the limitation that losses from sales and exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges?
YES
18. What is the philosophy behind the provision taxing capital gains at more favorable rates than ordinary income? 19. The rules on the recognition of capital gains or losses where the taxpayer is a corporation. 1. Capital gains and losses are recognized to the extent of 100% 2. The net capital loss carry-over is not applicable 3. Capital losses are deductable only to the extent of capital gains 4. Ordinary losses are deductable from capital gains but net capital loss cannot be deducted from ordinary gain or income 20. Is the interest paid on the proceeds of the expropriation of a capital asset taxable as a capital gain or as ordinary income? 21. Under the Tax Code and the Regulations, what are considered as equivalent to sales or exchanges of capital assets as to give rise to the applicability of the rules on capital gains and losses? 1. Retirement of Bonds, etc - amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation with the interest coupons or in registered form, shall be considered as amounts received in exchange therefore. 2. Short sales of property – gains or losses from such sales shall be considered as (short-term) gains or losses from sales or exchanges of capital assets. 3. Failure to exercise privilege or option to buy or sell property – gains or losses attributes to such failure shall be considered as capital gains or losses. 22. Short Sale * It is a transaction in which the seller sells securities which he does not own and therefore cannot himself supply the securities for delivery in expectation of the deadline in their price. 23. For income tax purposes, when is a short sale deemed to be consummated? 24. In the determination of capital gain and losses, how are cost and expenses of acquisition and disposition of capital assets treated for income tax purposes? 1. The cost of acquisition is capitalized 2. The expenses of acquisition are to be treated as part of the cost and must also be capitalized; 3. Expenses of disposition such as agents commission and other selling expenses are considered as reduction from the selling price.

D. CAPITAL GAIN TAX ON STOCK TRANSACTION 1. How are capital gains derived from sale or exchange of shares of stock taxed? 2. Who are subject to the final tax on capital gain derived from stock transaction? 1) Any individual taxpayer, citizen or alien 2) Any corporate taxpayer, domestic or foreign 3) All other taxpayer, not falling under 1 or 2 above, such a trust, estate, trust fund, pension fund, etc 3. State the exemption from the final capital gains tax on stock transaction
The tax does not apply to: 1) The gain derived by dealers in securities 2) The gain from sale of stock to the extent invested in new issue of shares of stocks in banks, non-bank financial intermediaries and corporation 4. For purposes of the tax, how shall the tax base be determined? 1) Determination of selling price 2) Determination of cost 3) Determination of the deductibility of capital losses 4) Installment sales 5. State the manner of filing the return and payment of the final capital gain tax on stock transaction. 6. Suppose a taxpayer elects and is qualified to pay the capital gains tax on stock transaction on installments, how shall the amount of the tax due on its installment payment be determined?
For purposes, installment received shall mean – a) On the date of sale or disposition b) Succeeding installment 7. State the nature and treatment of net capital gains and taxes imposed. 1) The net capital gains realized on stock transaction shall not be included in the gross income of the seller in computing his income tax liability. 2) The tax on capital gains on stock transaction shall be considered as a final tax which shall, in no case, be allowed as a deduction against income or credited against income tax or any other taxes.