Deductibility of Capital Losses Sustained in 1997 from Sales or Exchanges of Shares of Stock Classified as Capital Assets

April 13, 1998 BIR RULING NO. 037-98 27 (D) (2) 39 (A) (2) & (3) 000-00-37-98 Jardine Davies Inc. Jardine Davies Bldg. 22 Sen. Gil Puyat Avenue 1220 Makati City Attention: Atty . T . Dumpit Gentlemen : This refers to your letter dated May 21, 1997 requesting for a ruling that capital losses sustained during the taxable year from sales or exchanges of shares of stock classified as capital assets may be deducted currently (as opposed to year-end) from capital gains derived during the same taxable year from sales or exchanges of shares of stock classified as capital assets. It is represented that Jardine Davies Inc. (JDI), a domestic corporation, sold earlier last year some shares of stock classified as capital assets and sustained capital losses as a result of the sale; that during the same taxable year, JDI sold again some shares of stock classified as capital assets and derived capital gains as a result of the sale; that JDI now wishes to deduct the capital losses earlier sustained during the taxable year from the capital gains earned during the same taxable year and pay the tax imposed in then Section 24(e)(2) of the Tax Code, as amended, on net capital gains derived from the sale or exchange of shares of stock in a domestic corporation not traded through a local stock exchange. In reply, please be informed that under then Section 24(e)(2) of the Tax Code, as amended (now Section 27(D)(2) of the Tax Code of 1997), reading: "(e) Tax on certain incomes derived by domestic corporations . . . . "(2) Capital gains from sales of shares of stock . Capital gains realized from the sale, exchange or disposition of shares of stock in any domestic corporation shall be taxed as follows: "(A) Net capital gains as defined in Section 33(a)(2) realized during each taxable year from sale or exchange or other disposition of shares of stock not traded through a local stock exchange: Not over P100,000 10% Over P100,000 20% The term "net capital gain" and "net capital loss" are defined under Secs. 33(a)(2) and (3) of the Tax Code, as amended [now Secs. 39(A)(2) & (3) of the Tax Code of 1997], as follows: "(2) 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. "(3) Net capital loss . The 'net capital loss' means the excess of the losses from sales or exchanges of capital assets over gains from such sales or exchanges." It is clear from the statute that what is being taxed is only the "net capital gains" realized from the sales or exchange or other disposition of shares of stock not traded through a local stock exchange. If the legislature had intended to impose the tax on "capital gains", it would not have added the word "net" before "capital gains" in then Section 24(e)(2) of the Tax Code, as amended. Consistent with the statutory provision imposing a 10%-20% tax on net capital gains realized from the sale or exchange or other disposition of shares of stock not traded through a local stock exchange, the Bureau of Internal Revenue itself designed and prescribed BIR Form No. 1701 E-2, Revised April 1994, which every person making such sale or exchange or other disposition of shares of stock in a domestic corporation (not traded through a local stock exchange) is required to file within thirty (30) days after each sale or exchange or other disposition. The Capital Gains Tax Return thus takes into account, in determining the capital gains tax due on the stock transaction covered by the tax return, prior capital gains/loss realized during the year. This is of course logical inasmuch as the tax is imposed by law on the net capital gains, meaning the excess of the gains from sales or exchanges of shares of stock classified as capital assets over the losses from such sales or exchanges. Thus, the requirement of filing Capital Gains Tax Return after each stock transaction is not inconsistent with the intention of the law to impose the tax on net capital gains. LLphil Furthermore, the legal requirement of filing a final consolidated return covering all stock transactions during the taxable year does not mean that prior capital losses during the year may only be deducted from capital gains when such final consolidated return is filed at the close of the taxable year. Then Section 45(d) of the Tax Code requires, in addition to the filing of the capital gains tax return within thirty (30) days after each stock transaction, the filing of a final consolidated return of all transactions during the taxable year on or before the fifteenth day of the fourth month following the close of the taxable year. On the above bases, this Office is of the opinion that capital losses sustained during the taxable year 1997 from sales or exchanges of shares of stock classified as capital assets may be deducted from and to the extent of the capital gains derived during the same taxable year from sales or exchanges of shares of stock classified as capital assets. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall become null and void. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue