Capital Losses Under NIRC Section 39: The Gains-Only Limit, the 12-Month Rule, and the One-Year Carry-Over

NIRC Section 39 allows a capital loss only to the extent of capital gains, and for individuals it counts just 50% of any gain or loss on a capital asset held for more than 12 months. An unused net capital loss is not lost: an individual may carry it to the next taxable year, where it is treated as a loss on an asset held 12 months or less. The rule covers the netting step; separate final taxes apply to real property and unlisted shares.

What is a capital asset under Section 39? #

A capital asset is property held by the taxpayer, “whether or not connected with his trade or business,” other than stock in trade, inventory, property held primarily for sale to customers, depreciable property used in the business, or real property used in the business. Personal-use items such as a family car, jewelry, or art are capital assets. The Code defines the terms this way:

“(1) Capital Assets. - the term ‘capital assets’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.”

— Section 39(A)(1), National Internal Revenue Code (Republic Act No. 8424), as posted by LawPhil.

How does the 12-month rule change the amount counted? #

For taxpayers other than corporations, only a percentage of each gain or loss is counted: 100% if the asset was held for not more than 12 months, and 50% if held for more than 12 months. Corporations count the full amount. Section 39(B) states the percentages and Section 39(C) states the limit:

“(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income: (1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months; (C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.”

— Section 39(B)–(C), same source.

What happens to a net capital loss? #

If a non-corporate taxpayer ends the year with a net capital loss, Section 39(D) says the loss, “in an amount not in excess of the net income for such year,” is treated in the succeeding taxable year as a loss from the sale of a capital asset held for not more than twelve months. It therefore counts at 100% next year against that year’s capital gains.

Worked example: two years of sales by one individual #

Lorna Santos, an employee with a side hobby of selling collectibles, has these capital-asset sales (fictional figures).

Year 1

Net capital gain = ₱120,000 − ₱30,000 = ₱90,000. The loss is fully absorbed because the gains exceed it.

Year 2 (alternative scenario): Lorna sells only the car at a ₱60,000 loss after 30 months. The counted loss is ₱30,000, but with no capital gains, Section 39(C) allows nothing this year, leaving a ₱30,000 net capital loss. Under Section 39(D), that ₱30,000 becomes a short-term loss next year (subject to the net-income cap). If she then sells an item held 6 months at a ₱50,000 gain, the counted gain is ₱50,000 and the net capital gain falls to ₱20,000.

What this rule does not cover #

Section 39 is the netting rule. Gains from real property classified as capital assets and from unlisted shares are taxed under separate final tax regimes, and listed shares fall under the stock transaction tax. See BIR Form 1706 capital gains tax on real property, BIR Form 1707 capital gains tax on unlisted shares, and Basis of Property for Gain or Loss for computing the gain or loss itself. For stock losses, also read Wash Sales Under NIRC Section 38.

Summary #

NIRC Section 39 limits capital losses to capital gains, counts 100% or 50% of gain or loss for non-corporate taxpayers depending on a 12-month holding period, and lets a net capital loss carry to the next year as a short-term loss. The quoted text comes from RA 8424 as posted by LawPhil; later laws such as the TRAIN Law refer back to Section 39(B), but confirm the current consolidated text before applying it to a return.

Frequently asked questions #

Can I deduct a loss from selling a personal car or jewelry? #

Only against capital gains. Personal-use property is a capital asset under NIRC Section 39(A)(1), and Section 39(C) allows capital losses only to the extent of gains from sales or exchanges of capital assets.

What does the 12-month holding period change for individuals? #

For taxpayers other than corporations, NIRC Section 39(B) counts 100% of the gain or loss on an asset held not more than 12 months and 50% on an asset held more than 12 months.

Does the 50% rule apply to corporations? #

No. Section 39(B) applies to a “taxpayer, other than a corporation.” The gains-only limit in Section 39(C) still applies to corporations.

Can I carry over a capital loss I could not use this year? #

A non-corporate taxpayer can. NIRC Section 39(D) treats a net capital loss, up to the net income for that year, as a loss on an asset held not more than 12 months in the succeeding taxable year.

Does Section 39 decide how real property or unlisted share gains are taxed? #

No. Capital gains on real property and on unlisted shares are subject to separate final taxes, and listed shares are subject to the stock transaction tax. Section 39 supplies the definitions and the netting rules.