If you've sold shares at a loss, there's a silver lining: you can use that capital loss to reduce the tax you pay on your capital gains. Understanding how to offset capital losses against capital gains in Australia can save you real money at tax time.
This guide explains how capital losses work, when they apply, and how smart parcel selection can help generate losses strategically.
What are capital losses and how do they arise?
A capital loss occurs when you dispose of a CGT asset for less than its cost base. For share investors, this means selling shares for less than you paid for them (including brokerage and other incidental costs).
Capital losses are common. Markets go down, companies underperform, and positions are sometimes exited at a loss. The ATO allows those losses to be used to reduce overall capital gains tax liability.
Unlike capital gains, capital losses are not included in your assessable income. You can't deduct them against your salary, wages, or other income. They can only be used to offset capital gains (see ATO: Using capital losses to reduce capital gains).
The basic rule: losses offset gains in the same financial year
The core principle is straightforward. In any given financial year, your capital losses are subtracted from your capital gains. If you have a net capital gain after applying losses, that amount is added to your assessable income.
This applies to all CGT assets, Australian shares, US shares, property, crypto, and other investments. Losses from one type of asset can offset gains from another (with one exception covered below).
Worked example: losses reducing your gains
Let's say you're an Australian investor with the following results for the 2025-26 financial year:
| Disposal | Result |
|---|---|
| Sold 500 shares in ABC Ltd | +$2,000 capital gain |
| Sold 300 shares in XYZ Ltd | −$800 capital loss |
| Net capital gain | $1,200 |
The $800 loss offsets the $2,000 gain, leaving a net capital gain of $1,200. That's $800 less taxable gain than without the loss.
The ATO loss-ordering rules: which gains are reduced first?
The ATO doesn't let you choose which gains your losses offset. Instead, a specific ordering applies at the year level. This is important because it determines how the 50% CGT discount interacts with your losses.
The ATO year-level netting method (described in the ATO: How to calculate your CGT guide) works as follows:
- Separate your gains into two buckets. Gains on assets held for at least 12 months are discount-eligible. Gains on assets held less than 12 months are non-discount. Losses go into their own bucket.
- Apply losses to non-discount gains first. Each dollar of loss removes a full dollar of taxable gain, this is the most tax-efficient use of a loss.
- Apply any remaining losses to discount-eligible gains. Only after non-discount gains are exhausted.
- Apply the 50% CGT discount to whatever discount-eligible gains remain after losses.
- Sum the result. Remaining non-discount gains plus discounted gains equals your net capital gain, which is added to your assessable income.
This ordering is mandated by the ATO, you cannot reverse it or selectively apply losses to discount gains to preserve non-discount gains. The reason for the ordering is that it produces the highest taxable result: losses consume full-value gains first, so the discount is only applied to the remainder.
Worked example: loss ordering with mixed gains
Suppose you have the following results for a financial year:
| Disposal | Held | Result |
|---|---|---|
| Sold BHP shares | 18 months | +$4,000 gain (discount-eligible) |
| Sold CBA shares | 3 months | +$1,500 gain (non-discount) |
| Sold XYZ shares | 6 months | −$2,000 loss |
Applying the ATO netting method:
| Step | Calculation | Result |
|---|---|---|
| Non-discount gains | $1,500 | |
| Discount-eligible gains | $4,000 | |
| Total losses | −$2,000 | |
| Apply losses to non-discount first | $1,500 − $1,500 = $0 | $1,500 of loss used |
| Remaining losses to discount gains | $4,000 − $500 = $3,500 | $500 of loss used |
| 50% CGT discount on remaining | $3,500 × 50% = $1,750 | $1,750 discount |
| Net capital gain | $0 + ($3,500 − $1,750) | $1,750 |
Without understanding the ordering, you might assume the $2,000 loss comes off the $4,000 discount gain first (leaving $2,000, then discounted to $1,000, plus $1,500 non-discount = $2,500). But the ATO method gives $1,750, a different result. The ordering matters.
Carrying forward capital losses
If your capital losses exceed your capital gains in a financial year, you have a net capital loss. This loss cannot be claimed as a tax deduction against other income, but it doesn't disappear either.
Net capital losses are carried forward indefinitely and must be applied against the first available capital gains in future years. There is no time limit on how long you can carry them (see ATO: Using capital losses to reduce capital gains).
When carried-forward losses are applied in a future year, the same loss-ordering rules apply: losses offset non-discount gains first, then discount-eligible gains, before the 50% discount is calculated.
The ATO requires you to record any unapplied net capital losses at label V (Net capital losses carried forward to later income years) in your tax return. You must apply them, you cannot choose to "save" a carried-forward loss for a later year if you have gains in the current year.
Losses on personal use assets
Not all capital losses can be used to offset gains on shares. Losses on personal use assets, items you acquired for personal enjoyment or use (not investment) that cost less than $10,000, cannot be offset against investment gains.
For example, if you sell a boat or a piece of furniture at a loss, that loss cannot reduce your capital gains on ASX or US shares. It can only offset gains on other personal use assets. For more detail on what losses are claimable, see ATO: When you can claim losses on shares and units.
How CGT parcel selection helps with loss harvesting
Understanding how to offset capital losses against capital gains in Australia is only half the picture. The other half is generating the right losses in the first place, and that's where CGT parcel selection comes in.
If you hold multiple parcels of the same stock bought at different prices, some parcels may be sitting at a gain while others are at a loss. By using specific parcel selection, you can choose to sell the parcels that are currently at a loss harvesting those losses to offset gains elsewhere in your portfolio.
Without specific parcel selection, your broker defaults to FIFO (first in, first out), which may sell your oldest, and potentially most profitable, parcels first. That means you could be paying tax on a gain when you could have realised a loss instead.
For a full breakdown of how to calculate capital gains tax on shares, including how parcel selection and the CGT discount interact, see our detailed guide.
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How CGT Strategist helps
CGT Strategist is built to help Australian investors model their capital gains and losses across every disposal in a financial year. Upload your broker CSV, and the platform lets you:
- See your net capital gain or loss for each financial year, with every disposal broken down by parcel
- Compare parcel selection methods, FIFO, LIFO, and specific parcel selection, to find the combination that produces the best tax outcome
- Identify loss harvesting opportunities by reviewing which remaining parcels are currently sitting below their cost base
- Generate an Evidence Pack, a structured PDF and Excel report with every allocation, cost base, gain/loss calculation, and FX conversion for US shares
Modelling is free and unlimited. You only pay ($79.99 incl. GST) when you want to export your Evidence Pack for a given financial year.
Important: CGT Strategist is a calculation tool, not a tax agent. Results are based on the data you provide and should be reviewed by a registered tax professional.
No subscription, ever.
Upload your broker CSV and model your parcels free.
Unlock your Evidence Pack for $79.99 and regenerate it as many times as you need.
Frequently asked questions
How do capital losses offset capital gains?
Capital losses reduce your capital gains in the same financial year. If total losses exceed gains, the net position is a capital loss for that year.
Can I choose which capital gains my losses offset?
No. According to ATO guidance, capital losses must be applied against all capital gains. You cannot selectively apply losses only to certain gains while preserving others.
Can capital losses on personal use assets offset gains on shares?
No. Capital losses on personal use assets (items acquired for less than $10,000 for personal use) cannot be used to offset capital gains on shares or other investment assets. They can only offset gains on other personal use assets.
What order are capital losses applied to gains?
The ATO requires capital losses to be applied to non-discount capital gains (assets held less than 12 months) first. Any remaining losses are then applied to discount-eligible gains (held 12+ months). The 50% CGT discount is only calculated on whatever discount-eligible gains remain after losses.
Can I carry forward capital losses to future years?
Yes. If your capital losses exceed your gains in a financial year, the net loss is carried forward indefinitely. You must apply it against the first available capital gains in a future year, you cannot choose to skip a year.
How does loss harvesting work with CGT parcel selection?
Loss harvesting involves deliberately selling parcels that are currently at a loss to generate capital losses that offset your gains. By using specific parcel selection, you can choose the exact parcels that produce a loss rather than relying on FIFO, which may sell profitable parcels instead.