Difference between capital asset and ordinary asset?

- What is a capital asset?
Capital assets refer to all real properties held by a taxpayer, whether connected with his trade or business or not, and which are not included among the real properties considered as ordinary assets under Sec. 39(A)(1) of the Code. [Sec. 2(a) of RRNo. 7-2003]
- What is an ordinary asset?
Ordinary assets refer to all real properties specifically excluded from the definition of capital assets under Sec. 39(A)(1) of the Code, namely:
- Stock in trade of a taxpayer or other real 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
- Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or
- Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or
- Real property used in trade or business of the taxpayer.
Real properties acquired by banks through foreclosure sales are considered as ordinary assets. [Sec. 2(b) of RR No. 7-2003]
- Paying VAT
If the seller-taxpayer is a VAT-registered person, the sale of his ordinary asset is subject to VAT.
A person should register as a VAT entity if his gross annual sales and/or receipts exceed P1,919,500.00 in a year. If he is not originally registered as a VAT entity but he exceeded the threshold, he should submit BIR Form No. 1905 (Taxpayer Registration Update) to change to VAT.
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