Capital Gains Tax on Shares of Stock Not Traded in the Philippines

The sale of shares of stock in a domestic corporation that are not traded in the stock exchange is subject to a final tax of fifteen percent (15%) on the net capital gains realized during the taxable year. This rule is found in Section 24(C) of the National Internal Revenue Code (NIRC) for individual taxpayers and Section 27(D)(2) for domestic corporations, as amended by Republic Act No. 10963, the Tax Reform for Acceleration and Inclusion (TRAIN) Law. The tax applies to the sale, barter, exchange, or other disposition of unlisted shares. Shares sold through the stock exchange are excluded and are governed by a different tax regime.

What is the capital gains tax on shares of stock?

The capital gains tax on shares of stock is a final tax — meaning it is withheld at source and is not added to the seller's regular taxable income. Under Section 24(C) of the NIRC, a final tax of fifteen percent (15%) is imposed on the net capital gains realized during the taxable year from the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation, except shares sold or disposed of through the stock exchange.

For domestic corporations, Section 27(D)(2) of the NIRC imposes the same fifteen percent (15%) final tax on net capital gains from the sale, exchange, or other disposition of shares of stock in a domestic corporation, except shares sold or disposed of through the stock exchange.

The tax is called a "final tax" because it is fully satisfied at the point of withholding. The seller does not report the gain as part of gross income subject to the graduated or corporate income tax rates.

How is the tax base computed?

The tax is imposed on net capital gains, not on the gross selling price. Net capital gains means the excess of the total gains realized during the taxable year over the total losses realized during the same year from the sale or disposition of shares of stock not traded in the stock exchange.

Only the net gain is taxed at fifteen percent (15%). If the seller realizes a net loss, no capital gains tax is due. The law does not allow a carry-over of capital losses to other taxable years for this type of transaction.

Who is liable and who withholds the tax?

The seller or transferor of the shares is the taxpayer liable for the capital gains tax. Under the withholding tax system, the buyer or the broker typically withholds the tax and remits it to the Bureau of Internal Revenue (BIR).

Revenue Regulations No. 17-2003, which implements the withholding provisions of the NIRC, establishes that certain income payments — including capital gains — are subject to final withholding tax. The regulation provides that the tax is collected as a final withholding tax, meaning the withholding agent remits it in full satisfaction of the seller's tax liability on that transaction.

The burden of the tax falls on the seller, even though the mode of payment is through withholding by the buyer. As a practical matter, the tax withheld is treated as part of the consideration agreed upon between the seller and the buyer.

What is the difference between listed and unlisted shares?

The distinction is critical. Shares traded in the stock exchange are subject to a different tax — the stock transaction tax — which is a percentage tax on the gross selling price. Shares not traded in the stock exchange are subject to the fifteen percent (15%) final capital gains tax on net gains under Sections 24(C) and 27(D)(2) of the NIRC.

This means that if the shares are sold through the Philippine Stock Exchange, the transaction falls outside the coverage of the capital gains tax provisions. If the shares are sold privately, by direct transfer, or through any means other than the stock exchange, the fifteen percent (15%) final tax applies.

How is the tax reported and paid?

The capital gains tax on shares of stock not traded in the stock exchange is generally reported and paid through the filing of the appropriate BIR return, with the tax withheld by the buyer or broker and remitted to the BIR.

Revenue Regulations No. 17-2003, which amends the consolidated withholding tax regulations, provides the procedural framework for final withholding taxes. The regulation confirms that the capital gains tax on the disposition of capital assets is collected as a final withholding tax, and the withholding agent is responsible for remitting the tax to the BIR.

For specific deadlines, forms, and documentary requirements, taxpayers should refer to the latest BIR issuances and revenue regulations, as these may be updated from time to time.

Frequently asked questions

Is the 15% capital gains tax on shares of stock a final tax? Yes. Under Section 24(C) of the NIRC, the fifteen percent (15%) tax on net capital gains from the sale of shares of stock not traded in the stock exchange is a final tax. It is withheld at source and is not part of the seller's regular taxable income.

What is the difference between shares traded and not traded in the stock exchange? Shares sold through the stock exchange are excluded from the capital gains tax under Sections 24(C) and 27(D)(2) of the NIRC and are subject to a different tax. Shares not traded in the stock exchange are subject to the fifteen percent (15%) final tax on net capital gains.

Who pays the capital gains tax on the sale of shares? The seller or transferor of the shares is the taxpayer liable for the tax. The buyer or broker typically withholds the tax and remits it to the BIR, but the economic burden falls on the seller.

Practical takeaways

• The sale of shares of stock in a domestic corporation not traded in the stock exchange is subject to a final tax of fifteen percent (15%) on net capital gains under Section 24(C) of the NIRC for individuals and Section 27(D)(2) for domestic corporations.
• The tax applies to the net capital gains realized during the taxable year, not to the gross selling price.
• Shares sold or disposed of through the stock exchange are excluded from this tax and are governed by a separate tax regime.
• The seller is the taxpayer liable for the tax, but the buyer or broker typically withholds and remits it to the BIR.
• Revenue Regulations No. 17-2003 provides the procedural framework for the final withholding tax on capital gains.

Primary sources

The rules discussed above are drawn from the following primary sources. Where the firm's library holds the document as a PDF it is embedded here in full; the rest are cited by title.

RR No. 16-2005 — Prescribes the Consolidated Value-Added Tax Regulations of 2005 superseding RR No. 14-2005 (Published in Manila Times on Oct. 21, 2005) Digest | Full TextOpen in Law LibraryDownload PDF

RR No. 17-2003 — Amends further pertinent provisions of RR Nos. 2-98, 8-98 and 13-99, as amended, by providing for additional transactions subject to Creditable Withholding Tax and re-establishing the policy that the Capital Gains Tax on the sale, exchange or other disposition of real property classified as capital assets shall be collected as a Final Withholding Tax (published in Manila Bulletin Open in Law LibraryDownload PDF

• REPUBLIC ACT NO. 10963 - AN ACT AMENDING SECTIONS 5,6, 24,25, 27, 31, 32, 33, 34, 51, 52, 56, 57, 58, 74, 79, 84, 86, 90, 91, 97, 99, 100, 101, 106, 107,108,109,110,112,114,116,127,12S, 129, 145, 148,149,151,155,171,174,175,177,178,179,180, 181, 182, 183,186,188,189,190,191,192, 193,194,195, 196, 197,232, 236,237,249, 254, 264,269, AND 288; CREATING NEW SECTIONS 51-A, 148-A, 150-A, 150-B, 237-A, 264-A, 264-B, AND 265-A; AND REPEALING SECTIONS 35,62, AND 89; ALL UNDER REPUBLIC ACT NO. 8424, OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.