How to offset capital gains with losses in Australia

When you sell shares at a loss in Australia, that capital loss can be used to reduce the tax you pay on your capital gains. But the ATO has specific rules about the order in which losses are applied, what they can offset, and how they carry forward. Getting these details right can save you a significant amount in tax.

This guide covers the rules, walks through a detailed worked example, and explains the record-keeping requirements for carried-forward losses.

Disclaimer: This article is for informational purposes only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your circumstances.

The basic rule

Capital losses reduce capital gains. If you have both gains and losses in the same financial year, you subtract the losses from the gains to arrive at your net capital gain. Only the net gain is included in your assessable income.

If your losses exceed your gains, you have a net capital loss. That loss is not deductible against other income (such as salary or business income). Instead, it carries forward to future years where it can offset future capital gains.

The order of offset

The order in which losses are applied matters, because it interacts with the 50% CGT discount. The ATO requires the following sequence:

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

The critical point is step 4: the 50% CGT discount is applied last, after all losses have been subtracted. This means that each dollar of capital loss offsets a full dollar of gain before the discount halves it.

You cannot choose which gains to offset

Some investors assume they can direct their losses against specific gains (for example, offsetting short-term gains first to maximise the benefit). However, the ATO's approach is that you apply losses against gains in a way that gives you the best outcome. In practice, this means applying losses against gains that would not receive the CGT discount first (short-term gains), and then against discountable gains.

The ATO worksheet guides you through this process, and most tax software handles it automatically.

Worked example with multiple gains and losses

Here is a detailed example for the 2025-26 financial year. Assume the taxpayer is an individual with a marginal tax rate of 30% (plus 2% Medicare levy).

Transactions during the year

The taxpayer also has a carried-forward capital loss of $1,500 from the 2024-25 financial year.

Step 1: Categorise gains and losses

Gains:

• CBA: $6,000 (discountable, held over 12 months)
• CSL: $8,000 (discountable, held over 12 months)
• Total gains: $14,000

Losses:

• WES: $2,500 (current year)
• ZIP: $3,000 (current year)
• Total current-year losses: $5,500
• Carried-forward loss: $1,500
• Total losses: $7,000

Step 2: Apply current-year losses against gains

Total gains: $14,000 Less current-year losses: -$5,500 Remaining gains: $8,500

Step 3: Apply carried-forward losses

Remaining gains: $8,500 Less carried-forward losses: -$1,500 Net gains before discount: $7,000

Step 4: Apply the 50% CGT discount

Both remaining gains (CBA and CSL) qualify for the 50% discount because they were held for more than 12 months.

Net gains after discount: $7,000 x 50% = $3,500 assessable capital gain

Step 5: Calculate the tax

At a marginal rate of 30% plus 2% Medicare levy (32% effective rate):

$3,500 x 32% = $1,120.00 in tax on the capital gains

What if the taxpayer had not offset losses?

Without applying losses, the calculation on the two gains would be:

• $14,000 in gains, after 50% discount = $7,000 assessable
• Tax at 32%: $2,240.00

The losses saved: $2,240.00 - $1,120.00 = $1,120.00 in tax savings

This demonstrates why tracking and applying losses correctly matters. For strategies on deliberately realising losses to offset gains, see our guide on tax loss harvesting in Australia.

Carry-forward rules

If your capital losses exceed your capital gains in a financial year, the net capital loss carries forward. Key points:

• No time limit. Capital losses can be carried forward indefinitely. A loss from 10 years ago can still offset a gain this year.
• Must be used when available. You cannot choose to save carried-forward losses for a future year if you have gains in the current year. If you have both gains and unused losses, you must apply the losses.
• Losses do not expire. Unlike some other jurisdictions, Australian capital losses never expire as long as you report them correctly.
• Carry-forward order. If you have losses from multiple prior years, apply them in the order they arose (oldest first).

Capital losses cannot offset ordinary income

This is one of the most commonly misunderstood rules. If you are classified as an investor (not a trader), your capital losses can only offset capital gains. They cannot reduce your salary, rental income, interest income, or any other type of assessable income.

This rule applies regardless of how large the loss is. If you have a $50,000 capital loss and no capital gains, the entire $50,000 carries forward. It does not reduce your tax bill in the current year at all.

The only exception is if the ATO classifies you as a share trader (carrying on a business of trading). In that case, your profits and losses are ordinary income and expenses, not capital gains and losses, and different rules apply. For more on this distinction, see our guide on share trading tax obligations in Australia.

The interaction with long-term vs short-term gains

Unlike the US, Australia does not have separate "short-term" and "long-term" capital gains categories with different tax rates. Instead, there is a single capital gains pool, and the 50% discount applies to gains on assets held for more than 12 months.

However, the distinction matters when applying losses. The ATO allows you to choose whether to apply losses against discountable gains or non-discountable gains first. Since non-discountable (short-term) gains are taxed at the full rate, it is generally more beneficial to offset those first.

For more on how the holding period affects your tax, see our guide on short-term vs long-term capital gains in Australia.

Record-keeping for carried-forward losses

The ATO expects you to keep records supporting any capital loss you are carrying forward, even if the original transaction was years ago. This includes:

• Records of the original purchase (date, price, quantity, brokerage)
• Records of the sale that created the loss (date, price, proceeds, brokerage)
• Your tax return from the year the loss was incurred showing the loss was reported
• A running record of how much loss remains after each year's offset

If you cannot substantiate a carried-forward loss, the ATO may disallow it. This makes accurate record-keeping essential, especially for losses you plan to carry for several years.

Track your gains and losses with TrackMyShares

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

You can also see your unrealised gains and losses at any time, helping you make informed decisions about whether to harvest losses before the end of financial year. Combined with accurate cost base tracking across multiple parcels, TrackMyShares gives you the data you need to optimise your tax position and keep the ATO satisfied.

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