Using Capital Losses to Offset Capital Gains

General information only. This is not tax or financial advice. Consult a registered tax agent for advice specific to your situation.

Capital losses are one of the most effective tools for reducing your CGT bill. When you sell an investment at a loss, that loss can offset gains from other investments — potentially saving thousands in tax.

But there are rules about how losses can be used, and timing matters. This guide explains how to use capital losses strategically.

What is a capital loss?

A capital loss occurs when you sell an asset for less than its cost base. The cost base includes:

• The purchase price
• Incidental costs (brokerage, stamp duty, legal fees)
• Capital improvements (for property)

Example: You buy shares for $10,000 plus $20 brokerage. You sell for $7,000 and pay $20 brokerage on the sale. Both brokerage amounts form part of your cost base, so your cost base is $10,000 + $20 + $20 = $10,040. Your capital loss is $10,040 - $7,000 = $3,040.

The fundamental rule

Capital losses can only offset capital gains — not other income.

You cannot use a capital loss to reduce your salary income, rental income, or any other form of assessable income. Losses are quarantined to the capital gains pool.

How losses are applied

Capital losses are applied in a specific order:

1. Current year capital losses are applied first
2. Then carried-forward losses from previous years
3. Losses are applied before the 50% CGT discount

This order matters. Because losses reduce the gain before the discount is applied, each dollar of loss effectively saves you tax at your marginal rate on 50 cents of gain (for discounted assets).

The ordering rule does not change on 1 July 2027 — losses still come off the gross gain first. What changes is what the remaining gain meets. The 50% discount applies only to CGT events before 1 July 2027; from that date it is abolished for individuals, trusts and partnerships and replaced by CPI cost base indexation on assets held 12 months or more, with the post-reform portion of the gain taxed at the higher of your marginal rate and a 30% minimum (Acts 49 and 50 of 2026). So from that date a dollar of loss shelters a full dollar of assessable gain rather than 50 cents. The Act also separates gains into deferred pre-reform and post-reform categories and applies losses against them in a set order — the legislated reform explainer sets out the sequence, and the CGT reform calculator models a gain either side of the date.

Worked example

At a 30% marginal rate, the tax saving from the $20,000 loss is $3,000.

This example assumes the gains and losses are realised before 1 July 2027, while the 50% discount still applies. On the same figures realised after that date there is no discount line: the net gain is worked out with a CPI-indexed cost base on the post-reform portion, and what remains is taxed at no less than 30%.

Carrying forward losses

If your capital losses exceed your capital gains in a year, the unused losses are carried forward indefinitely. There’s no time limit — you can use losses from 10 or 20 years ago against gains today.

Key points:

• Losses must be applied in the year they arise if there are gains to offset
• You can’t choose to defer applying a loss
• Carried-forward losses don’t expire
• Keep records of all losses, even if you don’t use them immediately

Tax loss harvesting

Tax loss harvesting is the strategy of selling investments at a loss to realise capital losses, which can then offset capital gains.

When to consider harvesting

• Near the end of the financial year when you have crystallised gains
• When you have assets trading below your cost base
• When you want to rebalance your portfolio anyway
• During market downturns when losses are available

The wash sale rule

Australia doesn’t have a formal “wash sale” rule like the US, but the ATO has general anti-avoidance provisions (Part IVA, ITAA 1936). If you sell an asset purely to create a tax loss and immediately buy it back with no genuine commercial purpose, the ATO may deny the loss under these provisions.

Important: There is no legislated “safe harbour” period (such as 30 days). The ATO assesses each arrangement on its facts and circumstances.

Practices that reduce risk:

• Have a genuine commercial reason for the sale beyond tax (e.g., rebalancing, exiting a position)
• Use the proceeds to buy a different (but similar) investment to maintain market exposure
• Don’t pre-arrange the buyback before the sale
• Document your reasons for the transaction
• Seek professional advice for significant amounts

Example strategy

You hold two ETFs:

• ETF A: $10,000 gain
• ETF B: $5,000 loss (unrealised)

If you sell both:

• Gross gain: $10,000
• Less loss: $5,000
• Net gain: $5,000
• After 50% discount: $2,500 taxable

That last step assumes both sales are contracted before 1 July 2027. From that date there is no discount line — the net gain, worked out with the cost base indexed for CPI on its post-reform portion, is assessable in full and taxed at the higher of your marginal rate and 30%.

You can then reinvest the ETF B proceeds into a similar (but not identical) ETF to maintain your market exposure while locking in the tax benefit.

Losses from different sources

Different CGT events create losses that are treated the same way:

• Share sales — most common source of losses
• Property sales — investment property sold below cost
• Managed fund distributions — can include capital losses
• Collectibles — losses can only offset collectible gains

Collectibles limitation

Losses from collectibles (art, jewellery, antiques, etc.) can only be used to offset gains from other collectibles. They cannot offset share or property gains.

Timing considerations

End of financial year

The most common time to harvest losses is in late June, when you know your total capital gains for the year. Selling loss-making investments before 30 June crystallises the loss in the current year.

High-income years

If you have a particularly high-income year (bonus, redundancy, large gain), harvesting available losses can provide immediate tax relief.

Low-income years

Be careful about harvesting losses when your income is low. You might be in a lower tax bracket, making the losses less valuable now than in a future high-income year.

However, you can’t choose when to apply losses — if you have both gains and losses in the same year, the losses must be applied.

The 1 July 2027 boundary

A dollar of loss is worth more against a post-reform gain than a pre-reform one. Against a discounted gain it removes only 50 cents of assessable gain; against a gain taxed under indexation and the 30% minimum it removes a full dollar. That is not a reason to hold losses back — you cannot choose when to apply them — but it does bear on which gains you choose to realise either side of 1 July 2027.

Record keeping requirements

You must keep records of all capital gains and losses, including:

• Purchase contracts and receipts
• Sale contracts and receipts
• Brokerage statements
• Records of carried-forward losses
• Cost base adjustments (capital improvements, etc.)

Keep these records for at least 5 years after you sell the asset or use the loss.

Common mistakes

1. Trying to offset other income

Capital losses cannot reduce salary, rental, or business income. Don’t sell investments at a loss expecting it to reduce your overall tax if you don’t have capital gains to offset.

2. Forgetting about the discount order

Losses are applied before the CGT discount. A $10,000 loss offsets $10,000 of gross gain, which would have become only $5,000 of taxable gain after the discount.

For CGT events from 1 July 2027 there is no discount to order against, so the arithmetic flips: the same $10,000 loss offsets $10,000 of gain that would otherwise have been assessable in full.

3. Not tracking carried-forward losses

Many people forget about losses from previous years. The ATO tracks these in your account, but it’s wise to maintain your own records.

4. Wash sale concerns

Selling and immediately repurchasing the same asset can trigger anti-avoidance rules. If you want to maintain market exposure, buy a different (but similar) investment.

Key takeaways

• Capital losses can only offset capital gains, not other income
• Losses are applied before any discount — and the 50% discount itself only applies to CGT events before 1 July 2027, after which CPI cost base indexation and a 30% minimum tax replace it
• Unused losses carry forward indefinitely
• Tax loss harvesting can be a powerful strategy near EOFY
• Be cautious of wash sale arrangements
• Keep detailed records of all losses