Taxes on Stocks Investment

Manny Pacquiao's tax case with the BIR was all over the news the last two weeks where the famous boxer is being accused of not paying over P2.2 billion pesos to the government. Don't worry, we will not dwell on each side's arguments on the matter. But I think this is the best opportunity to discuss the related taxes associated in being a stocks investor. This is an important lesson to understand for new investors, and what long-time investors should already know. We will focus our discussion to transactions involving individual investors.Let's dive in to answer some of the common questions asked by fellow investors:

1. What are the taxes applicable for stocks investing?

For BIR purposes, there is a distinction whether a stock is traded in a public exchange or not.

For stocks listed in PSE, our tax authority requires us to pay 1/2 of 1% of the gross selling price of every stock transaction sold. Here is an example to show you how to compute your tax.

It is important to note that the BIR also requires stock brokers to withhold the amount and directly remit it to them. If you are familiar with how the tax system works, corporations and businesses act as collecting agents
and they would automatically deduct any tax collectible and they would be the ones to remit it to BIR. If what I'm trying to say is still not clear, just think about why you have never received the full amount of your salaries from employment. That's right, your employer automatically deducts the taxes you owe to the government not because they want to, but because they were told to do so.

If stocks not traded in PSE are sold, the following final tax rates are imposed on the net capital gains:

           Not over 100,000Php                            -   5%
           On any amount in excess of 100,000Php - 10%

Sale of shares on non-listed stocks are pretty uncommon so I won't provide further illustrations.

2. What is the tax rate for dividends?

Cash and property dividends are taxed at 10% of the gross amount. Stock dividends are not taxable because theoretically, you do not receive any additional monetary value from it.

3. Is there a tax for the gains in my stocks investment?

No. I've searched the BIR website and checked the forms, but there is no mention of any specific tax for your actual gains. If you think about it, you were already taxed when you sold your investment at 1/2 of 1% of gross amount so paying again may result into double taxation which is prohibited by the law.

4. Why is my broker deducting VAT from my stocks transactions?

Technically, VAT is not a tax imposed on you, but to your broker. The services rendered by them are subject to 12% VAT which they simply pass on to their customers since it is considered an indirect tax. This holds true for any transactions involving VAT. Refer to below for sample computation.

I hope I have enlightened you on your burning questions regarding taxes! You can also refer to the BIR website but it may be too hard to digest. I admit I'm no expert in taxation so feel free to drop me a message for any factual errors. If you have other tax-related questions just drop by the comments. Happy intelligent investing everyone!