IN sale of shares outside the facilities of the stock exchange, gain is calculated by deducting cost from the higher of the selling price or the fair market value of the shares sold. Unlike valuation of land, our National Internal Revenue Code (Tax Code) does not contain any express provision prescribing how to determine fair market value of shares of stock of corporations for taxation purposes. This gave the tax authorities some leeway in determining share valuation.

In financial parlance, “fair market value” is commonly known as the “arm’s length price.” It is generally the price at which buyers and sellers with a reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business. (Merriam Webster). Thus, in the case of listed shares sold, transferred, or exchanged outside the facilities of our stock exchange, the closing price on the day when the shares are sold, transferred, or exchanged, is deemed to be their fair market value.