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Baquiano 1

Atty. Baquiano
Baquiano & Associates
Research Material/Lecture

1. Can you deduct capital losses from ordinary gains? Explain

No. Capital losses can be deducted only from or to the extent

of Capital gains. Section 39[C]

Losses incurred from the sale, exchange or other dispositions

of capital assets are not allowed as deductions from gross
income. The reason is that capital losses are not allowed to
be deducted from ordinary income because the capital
assets did not help earn the ordinary income. Only necessary
expenses are allowed as deductions from gross income.

 Rules on Capital Gains or losses of Individuals and

Corporation
 The following rules apply where the transaction involves
personal property classified as capital asset:

1. Percentage of Gain or Loss to be taken into account.

2. Capital Losses shall be deducted only to the extent of
the capital gains.
3. A Net Capital Loss in a taxable year in an amount not in
excess of the taxable income for that year shall be
deducted from the Net Capital Gains of the next
succeeding calendar year (only);
4. Ordinary Losses are deductible from Capital Gains but
Net Capital Loss cannot be deducted from Ordinary
Gain or income.

Individual
1.100% if capital asset has
been held for 12 months or
less (short term)
Sec. 39 (B)
Corporation
1. Capital gains and losses
are recognized to the extent
of 100% regardless of the
holding period.

Holding Period is not

applicable to Corporation.

Please Note: Where the taxpayer is an individual, Estate and

Trust, a distinction is made between capital assets held for
12 months or less and those held for more than 12 months. If
the taxpayer is a corporation, the holding period is of no
significance. (Please refer to Sec. 39 [B]
2. 50% if the capital asset 2. Net capital loss carry-over
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has been held for more than is not applicable (Sec. 39 (D)
12 months (long term) Sec.
39 (B)
3. Capital losses shall be 3. Capital losses are
deducted only to the extent deductible only to the extent
of capital gains of capital gains.

Note: Only Capital Losses are allowed to be deductible from

Capital Gains to arrive at Net Capital Gains, UNLESS the
Corporation is a domestic bank or Trust Company where the
limitation does not apply (Sec. 39 ( C )

4. A net capital loss in a 4. Ordinary losses are

taxable year in an amount deductible from capital gains
not in excess of the taxable but net capital loss cannot be
income for that year shall be deducted from ordinary gains
deducted from the net capital or income
gains of the next succeeding
calendar year (only)
5. Ordinary losses are
deductible from capital gains
but net capital loss cannot be
deducted from ordinary gain
or income

Capital gains derived by

individuals from the sale or
other disposition or real
property are subject to final
scheduler tax on capital
gains under Sec. 24 (D)

Examples of Capital Assets

a. Stock and securities held by taxpayers other than dealers

in securities;
b. Jewelry not used for trade or business;
c. Residential house and lands owned and used such;
d. Automobiles not used in trade or business;
e. Paintings, sculptures, stamp collections, objects of arts
which are not used in trade or business;

f. Inherited large tracts of agricultural land which were

subdivided pursuant to the government mandate under land
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reform, then sold to tenants (Roxas vs. CTA, etc., L-25043,

April 26, 1968)
g. Real property used by exempt corporation in its exempt
operations such as corporation included in the enumeration
of Sec. 30 of the Code, shall not be considered used for
business purposes, and therefore considered capital asset.
( Sec. 3 b RR No. 7-2003)

h. Real property whether single, detached, townhouse or

condominium unit, not used in trade or business as
evidenced by a certification from the Barangay Chairman or
from the head of administration in case of condominium unit,
townhouse or apartment, and as validated from the existing
available records of the BIR shall be treated as capital asset (
Sec. 3 b RR 7-2003

Note: Real properties acquired by banks through foreclosure

sales are considered as their ordinary assets. However,
banks shall be not be considered as habitually engaged in
the real estate business for purposes of determining the
application rate of withholding tax imposed, under Revenue
Regulations ( last par. Sec. 2,b RR 7-2003)