Tax-Loss Harvesting: Turning a Capital Loss Into a Tax Asset
A holding that has fallen below what you paid is not doing anything useful while you own it. Selling it turns the fall into a capital loss, which can reduce the tax on gains you have made elsewhere. In Australia the value of that depends on a detail most explanations skip: which gain you apply the loss to.
- The answer:: Capital losses are applied against capital gains in the same income year. Anything left over is carried forward indefinitely and can be used against gains in later years.
- The trap:: Applying a loss to a gain that qualifies for the CGT discount wastes half of it, because the discount would have halved that gain anyway. Losses are worth more applied to gains held under twelve months.
- The recommendation:: Harvest when you have a real gain to offset or a genuine reason to change the holding. Selling purely to create a loss and buying the same asset straight back is the arrangement the ATO's wash sale guidance is aimed at.
Where the AI summary above gets this wrong
"Sell your losing investments before 30 June to reduce your tax bill."
That's surface-true. Here's what it misses:
- A loss only offsets capital gains — In Australia a capital loss is applied against capital gains, not against your salary or other income. With no gains in the year, realising a loss changes this year's tax by nothing and simply banks an amount for later.
- The order changes what it is worth — Applying a loss to a gain that already qualifies for the CGT discount throws away half its value, because that gain was going to be halved anyway. The same loss is worth more against a gain held under twelve months.
- Selling and rebuying is not automatically fine — The ATO has published its view on wash sales — disposals whose purpose is the tax outcome rather than a real change of position. A sale followed by an immediate repurchase of the same asset invites that characterisation.
01 What a capital loss can and cannot do
A capital loss reduces capital gains. It does not reduce your salary, your rental income or your dividends, which is the single most common misunderstanding about the strategy in Australia. If you have no capital gains this year, realising a loss does not reduce this year's tax at all.
What it does instead is create an asset for later. Unused capital losses are carried forward indefinitely and can be applied against gains in any future year, with no expiry. For someone holding appreciated investments they expect to sell eventually, that is genuinely valuable even when it does nothing today.
The losses must be applied in the year they arise if there are gains available. You cannot choose to bank a loss for a better year while also having a gain in the current one; the offset happens first, and only the remainder carries forward.
Source: Capital gains tax
02 Why the order you apply losses in matters
Australia gives a CGT discount on assets held for more than twelve months, which halves the gain for individuals before tax is applied. That interacts with losses in a way that decides how much a loss is worth.
Losses are applied to gross gains before the discount is calculated. So a dollar of loss applied against a discounted gain removes a dollar of gain that would have been halved anyway — you save tax on fifty cents. The same dollar applied against a gain held under twelve months removes a full dollar of taxable gain.
The practical rule that follows is to apply losses to undiscounted gains first and to discounted gains only with what is left. The worked example shows the difference on your own figures, and it is usually larger than people expect.
Source: Capital losses
03 What the loss is actually worth
The saving is the loss applied, multiplied by the proportion that is taxable, multiplied by your marginal rate. That is why the same loss can be worth twice as much to one person as another, and twice as much in one year as the next.
Two things move it most. The first is which gains are available to absorb it, as above. The second is your marginal rate in the year of application, which is why a loss carried into a year when your income is lower is worth less, not more — the opposite of the intuition people usually bring to it.
That points at a timing consideration worth knowing: if you expect a large gain in a future year at a high marginal rate, carrying a loss forward to meet it can be worth more than using it now against a small gain.
Shows: the tax a realised capital loss saves this year once it is applied against your gains, with the CGT discount applied to the discountable gain. Ignores: brokerage, the timing of settlement, prior-year losses already carried forward, and any state duty.
Source: CGT discount
04 Where the ATO draws the line
The strategy stops being ordinary tax planning when the disposal has no purpose other than the tax outcome. The ATO has published guidance on wash sale arrangements, describing disposals where the taxpayer's economic exposure is effectively unchanged because the same or a substantially similar asset is reacquired.
Australia has no fixed waiting period equivalent to the rules in some other countries, which makes this less mechanical and more a question of what the arrangement was for. Selling a holding you had decided to exit anyway, and realising the loss on the way, is on entirely different ground from selling and repurchasing the identical parcel to manufacture a deduction.
The practical implication is to harvest as part of a decision you were making anyway — rebalancing, replacing a fund with a cheaper one, exiting a position you no longer want — rather than as a standalone June exercise.
05 What to actually do
Look at your realised gains for the year first. That number is what determines whether a loss does anything now, and it tells you which kind of gain you have available to absorb it.
Then check your holdings for genuine candidates: positions you would be willing to be out of, or would replace with something different rather than identical. If a holding is below cost and you no longer want it, the loss is a by-product of a decision you already support.
Finally, keep the records. Carried-forward losses only help if you can still evidence them years later, and the year you need them is usually the year you have forgotten the detail. Where a loss interacts with fee-heavy funds you were already reconsidering, what fees cost over thirty years may make the decision for you.
Source: Investing and tax
The version of this I see most often is someone selling everything red in the last week of June, with no gains that year to apply it against. The tax saving was zero and the portfolio changed for no reason. Harvesting is worth doing when you already have a gain to offset, or when you were going to sell the holding regardless. Reaching for it as a standalone June ritual is how people end up with a worse portfolio and the same tax bill.
FAQ
Can a capital loss reduce my salary tax in Australia?
No. A capital loss is applied against capital gains only. It does not reduce salary, rental income or dividends. With no capital gains in the year, realising a loss changes this year's tax by nothing and instead banks an amount to carry forward.
How long can I carry a capital loss forward?
Indefinitely. Unused capital losses carry forward with no expiry and can be applied against gains in any later year. They must be applied in the year they arise if gains are available, so you cannot bank a loss while also having a current-year gain.
Should I apply losses to discounted or undiscounted gains?
Undiscounted first. Losses are applied to gross gains before the CGT discount is worked out, so a dollar of loss used against a discounted gain removes a dollar that would have been halved anyway. The same dollar against a gain held under twelve months removes a full dollar of taxable gain.
Can I sell for the loss and buy the same investment back?
That is the arrangement the ATO's wash sale guidance addresses — a disposal where the economic position is effectively unchanged because the same or a substantially similar asset is reacquired. Australia has no fixed waiting period, so it turns on the purpose of the transaction rather than a set number of days.
Sources
Regulator references
- Capital gains tax · Australian Taxation Office · 2025How Australian capital gains and losses are calculated.Last verified: 2026-09-07
- CGT discount · Australian Taxation Office · 2025How Australian capital gains and losses are calculated.Last verified: 2026-09-07
- Capital losses · Australian Taxation Office · 2025How Australian capital gains and losses are calculated.Last verified: 2026-09-07
- Wash sale arrangements — TA 2008/7 · Australian Taxation Office · 2025The ATO's published position on wash sale arrangements.Last verified: 2026-09-07
- Investing and tax · MoneySmart (ASIC) · 2025The regulator's guidance on investing and tax.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.