Capital gains
Capital loss
A capital loss occurs when the capital proceeds from a CGT event are less than the reduced cost base of the asset, and it can only be used against capital gains.
A capital loss is the opposite of a capital gain. It arises when a CGT event happens and your capital proceeds are less than the asset's reduced cost base. Selling shares for less than you paid for them is the classic example. The rules treat the loss as a special type of tax attribute, which behaves differently from the losses generated by running a business.
The key limitation is that a capital loss can only be offset against capital gains. It cannot be deducted from your salary, business income or other assessable income. If you have no capital gains in a year, the loss is not wasted. It is carried forward to future years and applied against later gains, with no expiry, provided you keep the records and meet the rules on reporting it in your tax return.
When working out the loss, the reduced cost base is used rather than the ordinary cost base. The reduced cost base leaves out certain elements, particularly the ongoing non-capital ownership costs, so it is usually slightly lower than the cost base. This means a capital loss can be smaller than you might expect if you simply compare the sale price with the amount you paid and your costs.
The order of application is important. Capital losses are applied against capital gains before the CGT discount is applied. In other words, you reduce your gains by the losses first and then halve what is left if the discount applies. You cannot choose to leave a loss unused in a year when there is a gain available to offset. Losses can generally be applied in the order that suits you, but they must be applied in full where gains exist.
Some losses are disregarded altogether. Losses on assets acquired before the start of CGT, on most personal-use assets, and on certain collectables used privately may not be recognised. If you buy back an asset or enter into a wash-sale style arrangement mainly to create a tax outcome, the ATO may look closely at it under anti-avoidance rules.
Business companies and trusts have extra tests before they can use carried forward capital losses, such as continuity of ownership tests. As with every area of tax, the details depend on your situation, so this should be treated as general information only. Check with the ATO or a registered tax professional before relying on a capital loss to reduce your tax.
Worked example
In 2024 Hannah sells shares for $8,000 that cost her $12,000 including brokerage, giving a capital loss of $4,000. She has no capital gains that year, so the loss is carried forward. In 2026 she makes a capital gain of $10,000 on another asset. She applies the $4,000 loss first, leaving $6,000, and if eligible then applies the 50% discount to reach a net capital gain of $3,000.
Practical tips
- Report capital losses in your tax return even when you have no gains that year, so they are recorded and carried forward.
- Apply losses before the 50% discount, not after, because applying them in the wrong order understates the benefit.
- Keep records of the original purchase for the life of the loss, since you may need them years later when you finally use it.