If you’ve sold an investment for less than what you paid, that loss isn’t wasted. You can use it to reduce the tax you pay on your capital gains. In Australia, the Australian Taxation Office (ATO) allows investors to offset their capital gains with capital losses.
This can lower your overall Capital Gains Tax (CGT).
Let’s break down how it works and clear up a few common questions investors often ask.
What Is a Capital Loss and How Can It Help You?
A capital loss happens when you sell an asset, like shares, managed funds, or property, for less than its cost base. The good news is that those losses can help reduce your tax bill.
Here’s the simple rule:
You use your capital losses to offset your capital gains. If your losses are greater than your gains, you carry the excess forward to future years.
Example:
You made a $10,000 profit selling one investment but lost $6,000 on another. You only pay CGT on the $4,000 net gain. That’s $6,000 less subject to tax, a clear benefit.
When Can You Use Capital Losses?
You can use your current year’s capital losses to offset your current year’s capital gains.
If you also have carried-forward losses from previous years, you can apply those too.
Here’s the order to follow:
- Apply your current year losses first.
- Then apply your carried-forward losses from earlier years.
If some of your capital gains aren’t eligible for the 50% CGT discount (for example, assets held less than 12 months), use your losses against those first. That way, you’ll get the most tax benefit.
What Happens If You Have More Losses Than Gains?
If your total capital losses are greater than your capital gains, you’ll have what’s called a net capital loss. You can’t use that loss to reduce other income, such as your salary, rent, or dividends. But you can carry it forward indefinitely and use it to offset future capital gains.
There’s no time limit. You can use those losses whenever you next make a capital gain, even if it’s many years down the track.
Are There Any Capital Losses You Can’t Use?
Yes, there are. Some losses simply don’t count for CGT purposes.
You can’t claim a capital loss from:
- Personal use assets such as your car, boat, or household furniture.
- Exempt assets like your main residence.
- Collectables worth $500 or less.
- Leases, unless they were mainly used to produce income (for example, a commercial lease).
- Arrangements to pay personal services income through an entity you control.
If a loss falls into one of these categories, it can’t be used to offset your capital gains.
How Do Capital Losses Work with Collectables?
Collectables, things like art, jewellery, coins, or antiques, have their own set of rules.
You can only use capital losses from collectables to offset capital gains from other collectables. You can’t use them against gains from shares or property.
If you don’t have any gains from collectables this year, don’t worry. You can carry the loss forward until you do.
Remember, if you bought a collectable for $500 or less, it’s not subject to CGT at all. Any gain or loss on it is ignored.
What About Companies and Trusts?
The rules differ slightly for companies and trusts.
Company Capital Losses
A company can use previous net capital losses to reduce capital gains in the current year, but only if it still meets one of two conditions:
- It’s under the same ownership and control, or
- It’s still running the same line of business.
If the company changes hands or business types, it may lose the ability to use those past losses.
Trust Capital Losses
Trusts can’t distribute capital losses to beneficiaries. The losses stay in the trust and can only be used to offset future capital gains made by that same trust.
What About Exempt Entities?
If an entity doesn’t pay income tax, such as certain charities or government bodies, its capital losses are ignored. Those losses can’t be used to offset any gains.
Why Should You Care About This?
Because ignoring capital losses means you could end up paying more tax than you need to. Many investors don’t realise how valuable proper record-keeping is until it’s too late.
If you track your investment results each year, those past losses can save you thousands down the line. Keeping detailed records, dates, purchase prices, and sale amounts, makes claiming your capital losses simple when the time comes.
Real-Life Example
Say you sold an investment property this year and made a $40,000 gain. You also sold some shares for a $15,000 loss. That loss reduces your taxable capital gain to $25,000.
If you held the property for more than 12 months, you might also qualify for the 50% CGT discount. That means you’d only pay tax on $12,500. Without recording and applying that $15,000 loss, your taxable gain would have been $20,000 higher.
That’s a difference worth paying attention to.
Common Mistakes to Avoid
Even experienced investors make these errors:
- Forgetting to report capital losses.
- Assuming losses can reduce ordinary income.
- Losing records of old investments.
- Not applying losses in the right order.
These small mistakes can cost you at tax time.
FAQs
Can I use capital losses to reduce my wage income?
No. You can only use them to offset capital gains.
How long can I carry forward a capital loss?
Indefinitely. There’s no time limit in Australia.
Can I choose which capital gains to offset first?
Yes. You can choose, but it’s smarter to offset non-discounted gains first.
Can I use losses from collectables against shares or property?
No. Collectable losses can only offset collectable gains.
What happens if I forget to claim a loss this year?
You can record it and use it in future years, but you need accurate records to prove it.
Final Thoughts
Capital losses are not a failure; they’re a tax opportunity. Used correctly, they can soften the impact of your capital gains and help you keep more of what you’ve earned.
If you’re unsure how to apply your capital losses or want to confirm you’re following the ATO’s rules correctly, it’s worth getting professional advice. An accountant or tax adviser can help you use your losses in the smartest way possible.
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