Capital losses are often overlooked in tax planning—but when used correctly, they can be a valuable tool for managing your overall tax position. The key is understanding what you can (and can’t) do with them.
What Is a Capital Loss?
A capital loss occurs when you sell an asset—such as shares, property, or crypto—for less than what you paid for it (after adjusting for costs like brokerage or fees).
Unlike regular deductions, capital losses don’t reduce your taxable income directly. Instead, they can only be used to offset capital gains.
What You Can Do With Capital Losses
The main benefit of a capital loss is that it can reduce (or eliminate) capital gains:
- Offset capital gains in the same financial year
- Carry forward unused capital losses to future years indefinitely
- Use losses strategically in years where you expect to realise gains
For example, if you’ve made a gain on the sale of shares this year, realising a capital loss on another investment before 30 June could reduce the tax payable on that gain.
What You Can’t Do
This is where many people get caught out:
- You can’t use capital losses to reduce salary, business income, or rental income
- You can’t carry losses back to offset gains from prior years
- You can’t claim a loss if the asset was for personal use (like cars, boats, or household items)
This means timing and planning are important—realising a loss only has a benefit if there’s a gain to offset, either now or in the future.
Watch Out for “Wash Sales”
One strategy the ATO pays close attention to is known as a wash sale—where you sell an asset to realise a loss, then repurchase the same (or substantially similar) asset shortly after.
If the dominant purpose is to obtain a tax benefit, the ATO may deny the loss. In other words, you need a genuine commercial reason for selling, not just a tax-driven one.
Timing Matters
Capital losses only count once they are realised—that is, when the asset is actually sold. Unrealised losses (where the asset has dropped in value but hasn’t been sold) don’t have any tax effect.
That’s why EOFY is often a key time to review your investments and decide whether it makes sense to realise any losses before 30 June.
The Bottom Line
Capital losses can be a useful planning tool—but only in the right circumstances. They don’t reduce your income directly, and their benefit depends on having capital gains to offset.
If you’re unsure how capital losses fit into your broader tax position, or whether it makes sense to realise a loss this year, get in touch with our team—we can help you plan it properly.
