Not every investment makes money, and the tax system recognises that. When you sell an asset for less than it cost you, you make a capital loss — and while a loss is never the goal, it is far from worthless. Capital losses offset capital gains, reducing your tax, and any unused loss can be carried forward indefinitely to soak up gains in future years. Used well, a loss from a bad year can quietly reduce the tax on a great year down the track.
This guide sits under our pillar, capital gains tax in Australia. It explains how losses are calculated, the crucial ordering rules, and how to bank losses for the future.
What is a capital loss?
A capital loss arises when your cost base exceeds your capital proceeds — in other words, you sell for less than the asset really cost you (including brokerage, stamp duty and other cost-base elements). Like gains, losses only crystallise when you actually dispose of the asset. A “paper loss” on something you still hold does nothing for your tax until you sell.
Capital losses can arise on the same range of assets that produce gains: shares, ETFs, managed funds, investment property, crypto and business assets.
The golden rule: losses only offset capital gains
The single most important thing to understand is that capital losses can only be offset against capital gains — not against your salary, business income, rent or interest. If you have a capital loss but no capital gains this year, the loss is not “wasted”, but it cannot reduce your other income. Instead it is carried forward.
This is different from ordinary tax deductions, and it catches people out. A $10,000 share loss does not reduce your $90,000 salary; it waits until you have a capital gain to use it against.
Carrying losses forward — indefinitely
If your capital losses in a year exceed your capital gains (or you have no gains at all), the unused amount becomes a net capital loss that you carry forward to future years. There is no time limit — losses can be carried forward indefinitely until you have gains to absorb them, provided you keep lodging tax returns and keep records of the loss.
For individuals, there are no special tests to carry losses forward — you simply record the net capital loss each year and bring it forward. (Companies and, to a degree, trusts face additional tests such as continuity of ownership before they can use carried-forward losses; individuals do not.)
The ordering rules — apply losses before the discount
Here is where a little care makes a real difference. When you work out your net capital gain for the year, the order is:
- Total your capital gains for the year.
- Subtract your capital losses — current-year losses first, then carried-forward losses.
- Apply the CGT discount (50% for individuals on gains held more than 12 months) to whatever discountable gain remains.
Because losses come off before the discount is applied, which gains you offset matters. You can choose the order, and the tax-smart choice is usually to:
- Offset losses against non-discounted gains first (assets held under 12 months, which get no discount), and
- Leave the discounted gains intact, so the 50% discount applies to as much of your gain as possible.
Why the ordering matters — a quick illustration
Suppose you have a $10,000 discounted gain (held >12 months), a $10,000 non-discounted gain (held <12 months), and a $10,000 capital loss to apply.
| Approach | Result |
|---|---|
| Loss against the non-discounted gain | $10,000 discounted gain remains → 50% discount → $5,000 taxable |
| Loss against the discounted gain | $10,000 non-discounted gain remains → no discount → $10,000 taxable |
Same loss, same gains — but applying the loss to the non-discounted gain leaves you with half the taxable amount. Our CGT calculator guide shows this working end to end.
Worked example: banking a loss for later
Priya sold shares in 2023-24 at a $12,000 loss, with no gains that year. She recorded the $12,000 as a net capital loss and carried it forward.
Two years later she sells an investment property for a $60,000 gain (held more than 12 months):
| Item | Amount |
|---|---|
| Gross capital gain | $60,000 |
| Less carried-forward loss | −$12,000 |
| Gain after losses | $48,000 |
| 50% discount | −$24,000 |
| Net capital gain added to income | $24,000 |
The loss she recorded years earlier reduced this year’s taxable gain by $12,000 before the discount even applied. That is the value of diligently recording losses even when you have nothing to offset them against yet.
Using losses as a deliberate strategy
Because losses offset gains, some investors realise losses on purpose before 30 June to offset gains they have already made that year — sometimes called tax-loss selling. If you hold an underperforming asset you no longer want, selling it can crystallise a useful loss.
One important caution: the ATO scrutinises wash sales, where you sell an asset purely to book a loss and then buy it straight back to keep your position. That can be treated as a scheme to obtain a tax benefit and denied. Any loss sale should be a genuine change to your holdings.
This links to the broader strategies in how to reduce CGT legally, which combines loss offsetting with the 12-month discount and super contributions.
Special rules for collectables and personal-use assets
There is one important exception to the general “any loss offsets any gain” rule. Collectables (art, jewellery, antiques, rare coins and the like) form their own quarantined category: a capital loss on a collectable can only be offset against a capital gain on another collectable, not against gains on shares or property. Losses on personal-use assets (such as a boat or furniture held for private enjoyment) are generally disregarded altogether. So if you sell a painting at a loss, that loss cannot shelter a share gain — it waits until you have another collectable gain to use it against. Keep collectable losses recorded separately so you can track them correctly.
Record-keeping is the whole game
Because losses can be carried forward with no time limit, the practical constraint is not the law — it is whether you can prove the loss years later. The ATO expects you to be able to substantiate the cost base, the proceeds and the date of every loss you carry forward. That means keeping buy and sell contracts, brokerage records, and your prior tax returns showing the net capital loss carried forward each year. A simple spreadsheet that rolls the balance forward annually is enough for most individuals, and it turns a forgotten loss from years ago into a ready-made deduction against a future gain.
Common pitfalls
- Expecting a loss to reduce your salary — it only offsets capital gains.
- Forgetting to record a loss in the year it happens, then being unable to substantiate it later.
- Applying losses to discounted gains first, wasting part of the 50% discount.
- Treating a paper loss as real — you must actually sell to crystallise it.
- Wash sales — selling and rebuying the same asset to manufacture a loss.
Keep a simple running record of every realised loss — the date, the asset, the amount and the year — so that when a good year finally comes, the loss is ready to work for you. For how losses fit into a specific asset class, see CGT on shares and CGT on investment property.
This article is general information only and not financial or tax advice; consider your own circumstances and speak to a licensed adviser or the ATO before acting.