Unrecognized Losses

After taking up the portion on exempt exchanges in this article, we now come here, where we will talk about exchanges and sales whose losses won't be recognized by the BIR and deductions will be prohibited. Whether or not you profit from these sales or exchanges, your losses will be disregarded by the BIR:

1.) Exchanges/sales between related parties (see below)

2.) Wash sales (unless made between dealers in securities)

3.) Exchanges in mergers and consolidations that are partly in kind and partly in cash (the cash portion is taxed)

4.) Illegal transactions

5.) Sales/exchanges generally not at an arm's length.

Related Parties

These just don't mean relatives. They also refer to members of a trust (grantor/trustor, fiduciary/trustee & beneficiary) as well as between corporations -if a single individual owns more than 50% of the outstanding stock of each corporation, if either is a personal holding company, whether local or foreign. Related parties can also refer to an individual and a corporation if he owns more than 50% of its outstanding stock.

"Not at arm's length" refers to a transaction where the consideration paid isn't commensurate with the thing's value because oc a certain relationship, such as between a parent company and its subsidiary.