SALE, EXCHANGE AND OTHER DISPOSITION OF DOMESTIC STOCKS

DIRECTLY TO BUYER

Domestic Stocks

Domestic stocks are evidence of ownership or rights of ownership in a

domestic corporation regardless of its features such as;

1. Preferred stocks
2. Common stocks
3. Stocks rights
4. Stock options
5. Stock warrants
6. Unit of participation in any association, recreation or amusement
club

The capital gains tax covers not only sales of domestic stocks for cash but
also exchange of domestic stocks in kind and other disposition such as:

1. Foreclosure of property in settlement of debt

2. Pacto de retro sales
3. Conditional sales
4. Voluntary buy back of shares by the issuing corporation

Term other disposition does not include:

1. Issuance of stocks by a corporation

2. Exchange of stocks for services
3. Redemption of shares in a mutual fund
4. Worthlessness of stocks
5. Redemption of stocks for cancellation by the issuing corporation
 6. Gratuitous transfer of stocks

ISSUES OF STOCKS INCLUDING TREASURY STOCKS

The issue of stocks to stockholders by a corporation is a financing

transaction rather than a sale transaction. The excess of fair value
received over the par value of shares issued is an additional capital to the
corporation.

Exchange of stocks for services

The exchange or issue of stocks for services cannot be considered

as exchange for property. No gain or loss can be imputed as it involves
payment of expense in kind.

Redemption of shares in amutual fund

Gains from redemption of shares in a mutual fund exempted by the

NIRC from income taxation.

Worthlessness of stocks

The value of stocks becoming worthless is considered a cpital loss

subject to the rules of regular income tax.

Redemption of stocks by the issuing corporation

 Under RR6-2008, any gain or loss on the mandatory redemption of
stocks by the issuing corporation for the purpose of stock cancellation
shall be subject to the rules of regular income tax.

The gain by the investor on redemption of the redeemable

preferred sales shall be subject to the regular income tax.

Gratuitous transfer of stocks

The gratuitous transfer of stocks either by the way of donation

inter-vivos or donation mortis causa is subject to transfer tax, not to
income tax.

MODES OF DISPOSING DOMESTIC STOCKS

Shares of stocks may be sold, exchanged or disposed.

1. Through the Philippine Stock Exchange (PSE) or

2. Directly to buyer

TAX ON SALE OF DOMESTIC STOCKS THROUGH THE PSE

The sale of domestic stocks classified as capital assets through the

PSE is not subject to capital gains tax. It is subject to a stock transaction
tax of of 1% of the selling price.
 Date Stock Code Selling price Cost Gain (Loss)
4/5/2014 AC P 4,000,000 P 3,700,000 P 300,000

4/5/2014 SMB P 3,000,000 P 3,200,000 ( P 200,000 )

Total

P 7,000,000 P 6,900,000 P 100,000

The stock transaction shall be computed as follows:

Total selling prices of stocks through P 7, 000, 000
the PSE

Multiply by: Transaction tax rate x 0.5%

Transaction Tax P 35, 000

Illustration 2: Dealer in Stocks

TAX ON SALE EXCHSNGE AND OTHER DISPOSITIONS OF DOMESTIC

STOCK DIRECTLY TO THE BUYER

The net gain on the sale, exchange, and other disposition of

domestic stocks directly to a buyer is subject to a two-tiered capital gains
tax:

TAX RATE

Net gain up to P 100,000.00 5%

Excess net gain above P 100,000 10%

The selling price shall mean:

In case of cash sale, the total consideration received per deed of

sale
If total consideration is paid partly in money and partly in property,
the sum of money and fair value of consideration received
In case of exchanges, the fair value of the property received

The net gain is determined as follows:

Selling price P xxx,xxx

Less:
Basic stocks exposed P xxx,xxx
 Selling expenses P xxx,xxx
Documentary stamp P xxx,xxx P xxx,xxx
tax on sale

P xxx,xxx

Illustration

Selling price should be computed as follows:

Fair value of building received P 2,500,00

Fair value of goods received P 100,000

Cash P 400,00

Total consideration or selling price P 3,000,000

What is tax basis of stocks?

If acquired by purchase, basis is the cost of the property which will

be determined by the following methods in descending order of
priority:
Specific identification
Moving average method
First-in, first out method
If acquired by devise, bequest, or inheritance the tax basis is the
fair value at the time of death of the decedent
 If acquired by gift the tax basis is the lower of the fair market
value at the time of gift and the basis in the hands of the donor or
the last preceding owner by whom it was not acquired by gift.
If acquired for inadequate consideration, the tax basis is the
amount paid by the transferee for the property.
If acquired under tax free exchange, the tax basis is the substituted
basis of the stocks.