How to offset capital gains with losses in Australia

Capital losses reduce capital gains. That is the core rule, and it is one of the most effective ways to lower your tax bill as a share investor. But the ATO has specific rules about the order losses are applied, and getting the sequence wrong means either overpaying tax or attracting ATO attention.

The order matters

The ATO requires this sequence:

1. Calculate each capital gain from all CGT events during the 2025-26 financial year
2. Apply current-year capital losses against those gains
3. Apply carried-forward losses from prior years
4. Apply the 50% CGT discount to any remaining gains on assets held over 12 months
5. Add the net capital gain to your assessable income

The critical detail is step 4: the discount is applied last, after all losses. Each dollar of loss offsets a full dollar of gain before it gets halved. This makes losses more powerful than many investors realise.

In practice, you apply losses against short-term (non-discountable) gains first, then against long-term gains. This gives you the best outcome, and the ATO expects you to do it this way.

Worked example

During the 2025-26 financial year, you make four sales:

You also have a $1,500 carried-forward loss from the prior year.

Total gains: $14,000 (both discountable, held over 12 months) Total losses: $5,500 current year + $1,500 carried forward = $7,000

After applying all losses: $14,000 - $7,000 = $7,000 remaining. Both gains qualify for the 50% discount: $3,500 assessable.

At a 32% effective rate (30% plus Medicare levy): $1,120 in tax.

Without applying losses, the tax would be $2,240. The losses saved you $1,120. For strategies on deliberately realising losses, see tax loss harvesting in Australia.

Carry-forward rules

If your losses exceed your gains, the net loss carries forward indefinitely. A few things to know:

• No time limit. A loss from 10 years ago still works.
• You must use them when available. You cannot save losses for a "better" year if you have gains now.
• Oldest losses first. Apply carried-forward losses in the order they arose.

Losses cannot offset salary or other income

If you are an investor (not a trader), capital losses only offset capital gains. A $50,000 capital loss with no gains means the entire amount carries forward. It does not reduce your tax bill this year at all.

The exception is if the ATO classifies you as a share trader, where profits and losses are ordinary income. Different rules apply. See share trading tax obligations in Australia for more on this distinction.

Short-term vs long-term interaction

Australia does not have separate short-term and long-term capital gains categories like the US. There is a single pool, with the 50% discount applied to qualifying gains after losses. Since short-term gains are taxed at the full rate, it is generally more beneficial to offset those first.

For more on holding periods, see short-term vs long-term capital gains in Australia.

Record-keeping for carried-forward losses

The ATO expects you to keep records supporting any loss you carry forward, even years later: the original purchase records, the sale that created the loss, the tax return where you reported it, and a running tally of remaining losses. If you cannot substantiate a carried-forward loss, the ATO may disallow it.

Track your gains and losses with TrackMyShares

TrackMyShares automatically calculates capital gains and losses across your entire portfolio, with correct treatment of the 50% CGT discount. The tax report feature gives you a clear summary for each financial year: total gains, total losses, and net position.

You can also see unrealised gains and losses at any time, helping you decide whether to harvest losses before 30 June.

Start tracking your portfolio with TrackMyShares

This is general information, not personal tax or financial advice.