Capital Asset Definition and Tax Treatment
Updated June 13, 2026
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Definition
A capital asset is property you hold, whether or not connected with a business, other than inventory, property held primarily for sale to customers, depreciable property used in a trade or business, and real property used in a trade or business. Selling a capital asset can trigger capital gains tax, such as the 6% tax on real property or the 15% tax on unlisted shares.
Under NIRC Sec. 39(A)(1), capital assets are all property held by the taxpayer except stock in trade or inventory, property held primarily for sale to customers in the ordinary course of business, property used in the business that is subject to depreciation, and real property used in the business. A house and lot you live in, a vacant lot held as an investment, shares of stock and personal jewelry are typical capital assets. The sale of a capital asset is taxed under special rules depending on the asset. For real property in the Philippines held as a capital asset by an individual, the capital gains tax is a final 6% of the gross selling price or fair market value (the higher of BIR zonal value and the assessor's value), whichever is highest. It applies even if the property is sold at a loss. These special rules are in NIRC Sec. 24(D) and 27(D) (renumbered in part by RA 12214). Gains on shares not traded on a stock exchange are subject to a 15% final tax on the net gain, while sales of listed shares through the stock exchange pay stock transaction tax on the selling price instead.
Detailed explanation
What is a Capital Asset?
Under NIRC Sec. 39(A)(1), a capital asset is property held by the taxpayer, whether or not connected with a trade or business, except: stock in trade or inventory; property held primarily for sale to customers in the ordinary course of business; property used in the business that is subject to depreciation; and real property used in the business. Those excluded items are ordinary assets.
Capital Assets vs. Ordinary Assets
The same kind of property can be either. If you are a real estate dealer and sell land as part of your regular business, those sales are ordinary income taxed at regular rates. If Juan dela Cruz, a salaried employee, sells a residential lot he inherited and never used in a business, the lot is a capital asset and the sale is subject to the 6% capital gains tax (NIRC Sec. 24(D)).
Types of Capital Assets in Philippine Tax Practice
Common capital assets include:
- Real property: A personal residence, or land and buildings held as an investment and not used in a business.
- Shares of stock: Listed shares and shares of private corporations held as investments.
- Personal property: Vehicles, jewelry and art held for personal use or investment.
- Intangibles: Rights held as an investment rather than used in a business.
Capital Gains Tax Rates
Sales of capital assets are taxed as follows:
- Real property: 6% final tax on the gross selling price or fair market value, whichever is higher, regardless of holding period or actual gain (NIRC Sec. 24(D), renumbered Sec. 24(B)(4) by RA 12214). Corporations selling land or buildings held as capital assets also pay 6% (NIRC Sec. 27(D)(5)).
- Unlisted shares: 15% final tax on the net capital gain (NIRC Sec. 24(C), renumbered Sec. 24(B)(3) by RA 12214).
- Listed shares sold through the exchange: No capital gains tax; stock transaction tax of 0.1% of the gross selling price from July 1, 2025 (NIRC Sec. 127, as amended by RA 12214).
- Other capital assets: Gains are included in income under the regular rules, with the holding-period percentages of NIRC Sec. 39(B) for individuals.
Exclusions from Capital Assets
The following are excluded from capital assets under NIRC Sec. 39(A)(1) and treated as ordinary assets:
- Stock in trade or inventory held for sale in the ordinary course of business.
- Property held primarily for sale to customers in the ordinary course of business.
- Depreciable property used in a trade or business.
- Real property used in a trade or business, whose sale is taxed under the regular income tax rather than the 6% capital gains tax.
Holding Period and Basis
For capital assets taxed under the regular rules, the gain is the selling price minus the adjusted basis, and individuals take into account 100% of the gain if the asset was held 12 months or less and 50% if held longer (NIRC Sec. 39(B)). Capital losses are deductible only up to capital gains (Sec. 39(C)). The 6% tax on real property ignores both the basis and the holding period.
Reporting Capital Gains
For real property held as a capital asset, the seller files BIR Form 1706 and pays the 6% tax within 30 days after the sale. For unlisted shares, the seller files BIR Form 1707 within 30 days after each sale and a final consolidated return by April 15 of the following year (NIRC Sec. 51(C)(2), as amended by RA 12214). Because these are final taxes, the gains are not taxed again on the annual income tax return.
Exemptions and Special Cases
Gains from the sale of a principal residence by a natural person are exempt from the 6% tax if all the proceeds are used to buy or build a new principal residence within 18 months, the BIR is notified within 30 days of the sale, and the exemption has not been used in the past 10 years; any unused part of the proceeds is taxed proportionally (NIRC Sec. 24(D)(2)). On sales to the government, an individual may choose between the 6% tax and the regular graduated rates (NIRC Sec. 24(D)(1)).
Why it matters
Classifying an asset correctly decides how its sale is taxed. Real property held as a capital asset is taxed at 6% of its selling price or value, while the same property held as an ordinary asset is taxed under the regular income tax. Unlisted shares are taxed at 15% of the net gain, and listed shares sold through the exchange pay 0.1% stock transaction tax. Getting the class wrong can lead to deficiency tax, surcharge and interest.
How it works
Identify the Asset Type
Determine whether the property is a capital asset or an ordinary asset. Inventory, property held for sale to customers, and depreciable or real property used in your business are ordinary assets (NIRC Sec. 39(A)(1)). Everything else you hold, such as your home, an investment lot or shares, is a capital asset.
Determine the Tax Base
For real property held as a capital asset, the base is the gross selling price or the fair market value, whichever is higher; your cost does not matter. For unlisted shares, the base is the net gain: selling price minus cost. For example, if Maria bought unlisted shares for ₱500,000 and sold them for ₱700,000, her net gain is ₱200,000.
Apply the Correct Tax Rate
Use the rate for your asset type: 6% final tax for real property held as a capital asset (NIRC Sec. 24(D), now Sec. 24(B)(4)), 15% final tax on net gains from unlisted shares (NIRC Sec. 24(C), now Sec. 24(B)(3)), or 0.1% stock transaction tax on the gross selling price of listed shares sold through the exchange (NIRC Sec. 127).
File and Pay on Time
For real property, file BIR Form 1706 and pay the 6% tax within 30 days after the sale; for unlisted shares, file BIR Form 1707 within 30 days after each sale (RR 11-2018; NIRC Sec. 51(C)(2), as amended by RA 12214). Late payment incurs a 25% surcharge and 12% annual interest (NIRC Sec. 248 and 249).
Examples
Salaried employee sells inherited residential lot
Anna Reyes, a teacher, sells a lot she inherited for ₱750,000, which is not lower than its zonal or assessed value. She owes 6% capital gains tax of ₱45,000 on the ₱750,000, filed on BIR Form 1706 within 30 days. Documentary stamp tax on the deed is ₱15 per ₱1,000, or ₱11,250 (NIRC Sec. 24(D) and 196).
Investor sells listed shares on PSE
Roberto Santos bought 1,000 shares of a listed company for ₱100,000 and sells them through the Philippine Stock Exchange for ₱150,000. There is no capital gains tax on the ₱50,000 gain. Instead, stock transaction tax of 0.1% of the ₱150,000 selling price, or ₱150, applies (NIRC Sec. 127, as amended by RA 12214).
Real estate dealer sells property
Carmelo Reyes buys and sells residential properties as his business. A property he sells for ₱2,000,000 (cost ₱1,500,000) is an ordinary asset held for sale to customers, so his ₱500,000 gain is business income taxed under the regular income tax, not the 6% capital gains tax (NIRC Sec. 39(A)(1)).
Principal residence exemption
Elena Gonzales sells her family home for ₱8,000,000 and uses all the proceeds to buy a new principal residence within 18 months. She notifies the BIR within 30 days of the sale, so the gain is exempt from the 6% tax. Her old home's cost carries over to the new one, and she can use the exemption only once every 10 years (NIRC Sec. 24(D)(2)).
Unlisted share sale by individual
Tomas Cruz sells shares in a private corporation for ₱300,000 (cost ₱200,000). His ₱100,000 net gain is subject to a 15% final tax of ₱15,000, reported on BIR Form 1707 within 30 days after the sale (NIRC Sec. 24(C), now Sec. 24(B)(3)).
Common misconceptions
- Myth: All property you own is a capital asset for tax purposes.
- Fact: No. Inventory, property held for sale to customers, and depreciable or real property used in your business are ordinary assets (NIRC Sec. 39(A)(1)).
- Myth: Capital gains tax is the same rate for all types of property.
- Fact: No. Real property held as a capital asset is taxed at 6% of selling price or value, unlisted shares at 15% of net gain, and listed shares sold through the exchange pay 0.1% stock transaction tax instead.
- Myth: You only owe tax if you hold the asset for more than one year.
- Fact: The holding period does not affect the 6% tax on real property or the 15% tax on unlisted shares. It matters only for other capital assets taxed under the regular rules, where individuals count 100% of the gain if held 12 months or less and 50% if held longer (NIRC Sec. 39(B)).
- Myth: Selling your family home always triggers capital gains tax.
- Fact: The sale is exempt if all proceeds go into a new principal residence within 18 months, the BIR is notified within 30 days, and the exemption was not used in the past 10 years. Any unused portion of the proceeds is taxed proportionally (NIRC Sec. 24(D)(2)).
- Myth: Capital gains are not reported if you sell property informally.
- Fact: The 6% tax on real property and the 15% tax on unlisted shares are due on every sale, with returns (BIR Forms 1706 and 1707) filed within 30 days. Unpaid tax draws surcharge and interest (NIRC Sec. 248 and 249).
Questions people ask
What is the difference between a capital asset and an ordinary asset?
Ordinary assets are inventory, property held for sale to customers, and depreciable or real property used in a business; all other property is a capital asset (NIRC Sec. 39(A)(1)). Gains on ordinary assets are business income taxed under regular income tax, while real property and unlisted shares held as capital assets are taxed at final rates of 6% and 15%.
Do I have to pay capital gains tax if I sell real property at a loss?
Yes, for real property held as a capital asset. The 6% tax is computed on the gross selling price or fair market value, whichever is higher, and the law presumes a gain, so it is due even when you sell below your cost (NIRC Sec. 24(D)).
Is the 6% capital gains tax the only tax I owe when I sell land?
No. The deed of sale is also subject to documentary stamp tax of ₱15 for every ₱1,000 of the selling price or fair market value, whichever is higher (about 1.5%) (NIRC Sec. 196), and the province or city charges a local transfer tax. Dealers selling land held as inventory pay regular income tax instead of the 6% tax.
What if I sell property that I improved or renovated?
For real property held as a capital asset, improvements do not reduce the 6% tax, because the tax is based on selling price or value, not on gain. Cost and improvements matter for the net gain on unlisted shares and on other capital assets taxed under the regular rules.
Do I need to report a capital gain if the buyer paid me in installments?
Yes. The 6% tax is based on the selling price or value of the whole property, not on the cash received so far, and the return is due within 30 days after the sale (NIRC Sec. 51(C)(2)).
What happens if I do not file BIR Form 1706 for a real property sale?
The 6% tax remains due, plus a 25% surcharge and 12% annual interest from the due date (NIRC Sec. 248 and 249). Without the return and payment, the BIR does not issue the electronic Certificate Authorizing Registration (eCAR) needed to transfer the title.
Can I defer capital gains tax by reinvesting the proceeds?
Only in one case. Gains from selling your principal residence are exempt if all the proceeds are used to buy or build a new principal residence within 18 months, the BIR is notified within 30 days of the sale, and the exemption has not been used in the past 10 years (NIRC Sec. 24(D)(2)). Other reinvestments do not defer the tax.
Are capital gains from cryptocurrency or digital assets taxed the same way?
The 6% and 15% capital gains taxes apply only to real property and unlisted shares. Gains from other property, including digital assets, are taxed under the regular income tax rules that apply to that taxpayer and transaction.
In practice
- Real estate agents and brokers distinguish property they sell on their own account as an investment (capital asset) from property they hold for sale to customers (ordinary asset).
- Individuals selling inherited property held as a capital asset file BIR Form 1706 and pay the 6% tax within 30 days of the sale.
- Corporations selling land or buildings held as capital assets pay a 6% final tax on the selling price or value (NIRC Sec. 27(D)(5)); other gains of corporations go into their regular corporate income tax.
- Non-resident Filipinos selling Philippine real property held as a capital asset pay the same 6% tax and need the BIR's eCAR to transfer the title.
- the 6% tax on real property and the 15% tax on unlisted shares are final taxes due within 30 days after each sale, so the timing changes the due date, not the rate. Land sellers also budget for documentary stamp tax of about 1.5% and the local transfer tax.
Next steps
Learn more
Capital Gains Tax Calculator
Real Property Tax Calculator
Stock Transaction Tax Calculator
BIR Form 1706 (Capital Gains Tax Return)
BIR Form 1707 (Capital Gains Tax Return For Unlisted Shares)
BIR Form 1701 (Annual Income Tax Return For Individuals)
Complete Guide To Capital Gains Tax Philippines
Real Property Sale Requirements
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Sources & References (1)
Primary sources and the laws, regulations, and official issuances this page relies on. Links open the recorded source documents or references.
- LawPhil Project (Arellano Law Foundation). “NIRC §39(A)(1) (capital assets definition): full text.” lawphil.net. NIRC of 1997 (RA 8424), Sec. 39(A)(1). Source checked .