Carry-Forward Capital Losses (Australia): How Long They Last

Carry-forward capital losses are a feature of the Australian tax system that allows investors to reduce future capital gains tax by preserving unused losses. Understanding how they work, and how to plan around them, is a practical part of long-term tax management.

Law update (15 July 2026): the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 is now law. The general rule that unused net capital losses carry forward has not been removed, but the calculation changes from 1 July 2027. The Act introduces four categories of capital gains and a mandatory order for applying current-year and prior-year capital losses.^⁴

This is general educational content, not tax advice. Individual circumstances vary. Consult a registered tax agent for advice specific to your situation.

What a Capital Loss Is#

A capital loss occurs when you sell a capital asset for less than its cost base.

Example: You bought 200 shares at $25 each ($5,000 total cost base). You sell them for $18 each ($3,600 total). Your capital loss is $1,400.

Capital losses are different from revenue losses (such as a business trading at a loss). The treatment of revenue losses is governed by different rules; this article focuses on capital losses arising from the disposal of capital assets like shares, ETFs, and investment property.

How Capital Losses Are Applied#

Capital losses must be applied against capital gains before the CGT discount is taken. The ATO requires this ordering.^¹

Step 1: Apply Losses Against Gains#

If you have both capital losses and capital gains in the same year, you net them off first:

Net capital gain = Total capital gains − Total capital losses

If the result is positive, you have a net capital gain to include in your taxable income (potentially after applying the 50% CGT discount for eligible assets).

If the result is negative (losses exceed gains), you have an unused capital loss to carry forward.

Step 2: Apply the CGT Discount (for gains under the current rules)#

For gains dealt with under the rules applying before 1 July 2027, the 50% CGT discount applies after losses are applied, not before. This order matters. The 2026 reforms retain the same broad principle—losses are applied before discount treatment—but replace the 50% discount with cost-base indexation for gains accruing from 1 July 2027, subject to transitional rules.

Example:

You have a $10,000 capital gain on an asset held for 14 months, and a $2,000 capital loss.

Applying losses first: $10,000 − $2,000 = $8,000 net gain.

Then applying the 50% discount: $8,000 × 50% = $4,000 assessable capital gain.

If you had applied the discount to the gross gain first: $10,000 × 50% = $5,000, minus the $2,000 loss = $3,000. This would be a better outcome for the taxpayer, but it is not the required order.

How Carry-Forward Losses Work#

If your capital losses in a year exceed your capital gains, the unused losses carry forward indefinitely. There is no expiry date.^²

In the earliest future year when you have capital gains, you apply the carried-forward losses before calculating your net gain. You cannot elect to preserve an available loss for a still later year.

Example over two years:

Year 1:

• Capital losses: $7,000
• Capital gains: $3,000
• Net loss: ($4,000) carried forward

Year 2:

• Capital gains: $10,000
• Carried-forward losses applied: ($4,000)
• Net capital gain: $6,000
• After 50% CGT discount (if eligible): $3,000 assessable

Without the carried-forward loss, the Year 2 assessable gain would have been $5,000 (assuming the sale occurs before 1 July 2027 and the asset qualifies for the 50% discount). Applying the $4,000 loss before the discount reduces the assessable gain by $2,000.

What Changes From 1 July 2027#

The 2026 Act changes how capital gains and losses are sequenced for the 2027–28 income year and later years. It creates four gain categories:

1. Deferred non-residential gains: broadly, the pre-1 July 2027 component of gains on assets such as shares and ETFs that are sold later.
2. Deferred residential gains: the pre-1 July 2027 component of gains on residential property sold later.
3. Non-residential gains: broadly, post-1 July 2027 gains on assets such as shares and ETFs.
4. Residential gains: broadly, post-1 July 2027 gains on residential property.

Current-year capital losses must reduce gains in that order. Previously unapplied net capital losses from earlier years are then applied in the same order. Within one category, you can still choose which gain to reduce first.^⁴

This matters because the categories can have different tax treatment. Deferred gains can retain the pre-1 July 2027 discount treatment where the requirements are met. Gains accruing from 1 July 2027 are generally calculated using an inflation-indexed cost base for eligible Australian resident individuals and trusts, and some gains of Australian resident individuals may be subject to a 30% minimum tax.^{⁴ ⁵}

Practical record-keeping point: retain the year each carried-forward loss arose, your running unused balance and the calculation showing how it was applied. For assets held across 30 June 2027, also retain parcel-level cost-base records and evidence supporting the transition value or approved apportionment method used for the pre- and post-reform components.

A Separate New Carry-Forward Rule for Residential Property#

The same 2026 Act also limits negative gearing for certain established residential properties from the 2027–28 income year. For affected investments acquired after 7:30 pm AEST on 12 May 2026, excess property deductions can become a quarantined amount that carries forward and can reduce specified residential property income or residential capital gains in a later year. Properties acquired before the announcement are generally grandfathered, and eligible new builds and other legislated categories have different treatment.^{⁴ ⁵}

This is not the same as a net capital loss:

• a net capital loss arises under the CGT rules and can only reduce capital gains
• a quarantined residential property amount arises from affected property deductions and can reduce the residential income and gain categories specified in the new law

Keep the balances separate. The post-2027 CGT method applies ordinary capital losses first, then applies eligible quarantined residential property amounts to deferred residential gains and residential gains.^⁴

Reporting Requirements#

Capital losses should be reported in the tax return for the year they are realised, even if they cannot be used in that year. This establishes the carry-forward balance and reduces the risk of a later dispute.

If a loss was omitted, do not assume it has vanished or simply insert it into a later return without support. Check whether the earlier return can be amended and keep the purchase, sale and cost-base records needed to establish the loss. Amendment periods and evidence requirements depend on the circumstances, so this is an appropriate point to use a registered tax agent.

The capital gains tax section of the individual tax return (Item 18) has fields for:

• Total capital gains
• Total capital losses from current year
• Total carried-forward capital losses from prior years
• Net capital gain after applying discounts

Keeping a record of your carry-forward loss balance, updated annually, is good practice. Your registered tax agent will track this if they complete your returns.

Using Carry-Forward Losses Strategically#

Carry-forward losses have limited strategic value if they sit unused for many years, because they are not indexed to inflation and do not earn a return. A $10,000 carry-forward loss used in ten years is worth less in real terms than if used immediately.

Planning Around Known Future Gains#

If you expect significant capital gains in a future year (for example, from a planned property sale or exercise of employee share options), an existing loss balance may reduce that gain. The planning choice is usually whether and when to realise the gain or a genuine economic loss—not whether to hold back a carried-forward loss once a gain is available. The tax law requires available losses to be used.

When Carry-Forward Losses Are Particularly Valuable#

• When a planned disposal creates a large gain: an existing loss balance can materially reduce the amount left in the CGT calculation.
• Against non-discountable gains under the current rules: where you have more than one gain and can choose the order within the rules, applying losses to a non-discountable gain can preserve more of the benefit of a discountable gain.
• Across the 1 July 2027 transition: the new statutory category order may determine which gain absorbs the loss. That reduces flexibility and makes pre-sale modelling more important.

Interaction with the CGT Discount#

Because capital losses must be applied before the CGT discount, using a carry-forward loss to offset a discountable (>12 months) gain reduces the pre-discount amount, which in turn reduces the value of the discount.

But you cannot choose to leave an available carried-forward loss unused when you have a capital gain to which it must be applied. Under the current rules, the flexibility is in choosing which capital gains the loss reduces first; from 1 July 2027, the four-category order narrows that choice further.

Common Situations Where Losses Arise#

Carry-forward loss balances often build up from:

• Shares in companies that declined significantly and were eventually sold
• ETF sales during market downturns (particularly if sold in fear rather than as part of a plan)
• Property investments that did not perform as expected
• Direct share investments in individual companies that failed

Many investors are unaware they have carry-forward losses because records were split across tax agents or old investment platforms. Review prior tax returns, notices of assessment and tax-agent workpapers, and reconcile them to the underlying trade records. Do not assume a broker or ATO account view contains a complete parcel-level loss history.

Summary#

Capital losses in Australia generally carry forward indefinitely and can reduce capital gains in future financial years. They cannot offset salary, dividends or other ordinary income, and they must be used when an available capital gain arises. Under the current rules, losses are applied before the 50% CGT discount. From 1 July 2027, the same loss-before-concession principle remains, but the 2026 Act requires losses to be applied across four gain categories in a fixed order before the post-reform tax treatment is finalised. Keep a running loss balance, the year each loss arose and parcel-level evidence supporting every calculation.