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.
Key takeaway
Unused capital losses carry forward indefinitely in Australia and can be applied against capital gains in future financial years. They cannot reduce other income, only capital gains.
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 (if Applicable)#
The 50% CGT discount applies to the net capital gain after losses are applied, not before. This order matters.
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 a future year when you have capital gains, you apply the carried-forward losses before calculating your net gain.
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 all assets held > 12 months). The $4,000 loss saved $1,000 in gross gain, which after the 50% discount reduced assessable income by $2,000.
Reporting Requirements#
Capital losses must be reported in the tax return for the year they are realised, even if they cannot be used in that year. This is how the ATO tracks your carry-forward balance.
If you do not report the loss in the year it arose, you cannot claim it in a future year. Retrospective amendments are possible within the amendment period (generally two years for individuals) but require contact with the ATO and supporting documentation.
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), carrying forward a loss and applying it in that future year is sensible. The timing of selling other assets (to realise losses in the same year as a large gain) can be coordinated with this in mind.
When Carry-Forward Losses Are Particularly Valuable#
- In years of high income: if a future year will have a high marginal tax rate, applying carry-forward losses in that year maximises their value.
- Before retirement: losses that would otherwise remain unused can be applied against gains realised during a period when income is higher.
- Against short-term gains: carrying a loss forward to offset a short-term capital gain (not eligible for the 50% discount) can produce a better outcome than using the loss to offset a discountable gain.
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.
In some cases, it may be preferable to not use a carried-forward loss in a year where all gains are discountable, and instead wait for a year with short-term (non-discountable) gains. This is a judgment that depends on timing, future expectations, and individual tax circumstances.
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 they stopped filing detailed tax returns or changed tax agents. Reviewing prior tax returns or asking the ATO for a statement of account can surface these balances.
Summary#
Capital losses in Australia carry forward indefinitely and can be applied against capital gains in future financial years. They cannot offset salary, dividends, or other income. Losses must be applied against gains before the 50% CGT discount is calculated, which means the discount applies to the net amount after losses are netted off. Carry-forward losses must be reported in the year they arise, even if unused, or they may be lost. Using losses strategically, particularly against short-term gains or in high-income years, can improve after-tax outcomes. Maintaining a running record of the carry-forward balance, updated annually, is a basic part of investment record keeping.
Sources#
- Australian Taxation Office. (2024). Capital losses. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/calculating-capital-gains-tax/capital-losses
- Australian Taxation Office. (2024). How to calculate your capital gains tax. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/calculating-capital-gains-tax
- Australian Taxation Office. (2024). Record keeping for CGT assets. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/keeping-records-for-investments