Tax-Loss Harvesting and Wash Sale Risk in Australia

Done carefully, it is a legitimate tax planning approach. Done carelessly, it can conflict with the ATO's wash sale rules, which apply where losses appear to be manufactured rather than genuine.

This article explains how tax-loss harvesting works in Australia, what the wash sale provisions cover, and how to think about the boundary between legitimate planning and arrangements that attract ATO scrutiny.

This is general educational content, not tax advice. Circumstances vary significantly. Consult a registered tax agent or financial adviser for guidance specific to your situation.

How Capital Losses Work in Australia#

A capital loss occurs when you sell an asset for less than its cost base. Capital losses can be used to:

• Offset capital gains in the same financial year (reducing your net capital gain and therefore your taxable income)
• Carry forward unused losses to offset capital gains in future financial years^¹

Capital losses cannot be used to offset other types of income (salary, dividends, rent). They can only reduce capital gains.

This means the value of crystallising a loss depends on whether you have (or expect to have) capital gains to offset against it. Realising a loss when you have no current or anticipated capital gains defers the benefit to a future year.

How Tax-Loss Harvesting Works#

The basic process:

1. Identify investments currently at a loss (current market value below cost base).
2. Sell those investments before the end of the financial year to realise the capital loss.
3. Apply the capital loss to offset capital gains from other sales in the same year.
4. If total losses exceed total gains, carry the excess forward to future years.

Example:

You hold two ETFs. ETF A has a capital gain of $8,000. ETF B has an unrealised loss of $3,000.

Without loss harvesting: taxable capital gain = $8,000.

With loss harvesting (selling ETF B): taxable capital gain = $8,000 − $3,000 = $5,000.

The $3,000 reduction in taxable gain, at a 47% marginal rate, represents a tax saving of $1,410.

The Wash Sale Problem#

The issue arises when an investor wants to maintain their investment exposure after harvesting the loss. They sell the asset, realise the loss, and then immediately rebuy the same (or a very similar) asset.

If the arrangement succeeds, the investor has:

• Reduced their tax liability by the capital loss
• Maintained the same economic position (still holding the asset)

The ATO views this type of arrangement with scepticism. Where a sale and repurchase is designed to obtain a tax benefit without any genuine economic change, it may apply the wash sale provisions or, in more serious cases, the general anti-avoidance rules under Part IVA of the Income Tax Assessment Act.^²

Australia's Approach: No Fixed Waiting Period#

Unlike the United States, which has a specific 30-day wash sale rule, Australia does not have a legislated fixed period before which repurchasing is prohibited.

Instead, the ATO looks at the overall arrangement and applies a substance-over-form analysis. The key question is whether the transaction reflects genuine economic activity or is structured primarily to generate a tax benefit.

Factors the ATO has indicated are relevant:^³

• How soon after sale the asset (or a substantially identical asset) is repurchased
• Whether there was a genuine intention to exit the position (the investor accepted market risk during the period between sale and repurchase)
• Whether the investor's actual economic position changed materially
• Whether the arrangement was entered into with the dominant purpose of obtaining a tax benefit

Scenarios: Safe vs Risky#

Generally Considered Lower Risk#

• Selling an investment that has genuinely declined and deciding (independently of tax) to exit the position and not rebuy.
• Selling an investment at a loss and, after a meaningful period (several months at minimum, during which market conditions could have changed), deciding to reinvest in the same or a similar asset.
• Selling one ETF (e.g., a broad Australian equities fund from one provider) and rebuying a genuinely different ETF (e.g., one that tracks a different index, has different sector composition, or uses a different strategy) to maintain broad exposure while changing specific holdings.

Higher Scrutiny Risk#

• Selling an ETF and immediately rebuying the same ETF the following day with no genuine intention to exit.
• Arranging to sell in one entity (personal name) and repurchase in another (trust, company, SMSF) where the same individuals control both, specifically to generate a tax loss.
• A systematic pattern of selling at a loss and rebuying shortly after, year after year, in a way that demonstrates no genuine intention to exit.

The line is not always clear. This is an area where specific circumstances matter significantly, and a registered tax agent is the appropriate person to assess individual situations.

Switching to a Similar but Different ETF#

A common approach to tax-loss harvesting while maintaining market exposure is to switch between similar but non-identical ETFs after realising the loss.

For example: selling a broad Australian equity ETF and purchasing a different Australian equity ETF that tracks a slightly different index (or the same index but managed by a different provider). This maintains exposure to the Australian equity market while making a genuine change to the specific holding.

Whether the ATO would treat two products as "substantially identical" in a given case is a factual question. ETFs tracking the same index from different providers are closer together; ETFs tracking different indices are more clearly distinct.

This approach is more defensible than selling and immediately rebuying the same ETF, but it is not without judgment required. Maintaining records of the rationale for the switch (beyond tax) can support the legitimacy of the arrangement.

Practical Tax-Year Considerations#

Tax-loss harvesting is most relevant in the weeks approaching 30 June. The timing has practical implications:

• Settlement timing: ASX trades settle in two business days (T+2). A sale must execute with enough time for settlement before 30 June for the loss to apply to the current year.
• Market liquidity: June can see unusual trading patterns around these dates, particularly in smaller securities.
• Planned sales: if you were already planning to exit a position, the tax year is a relevant factor in timing.

The decision to harvest a loss should also be weighed against:

• Transaction costs (brokerage on sale and repurchase)
• Potential loss of the 12-month CGT discount if the asset was approaching the 12-month holding period
• Whether the capital loss is useful in the current year (i.e., are there gains to offset?)

Summary#

Tax-loss harvesting is the practice of selling investments at a loss before the end of the financial year to offset capital gains and reduce tax. It is generally a legitimate strategy in Australia when it reflects genuine economic decisions. The ATO's wash sale provisions apply to arrangements designed to generate artificial tax benefits without real economic substance, such as selling and immediately rebuying the same asset with no genuine intention to exit. Australia has no legislated fixed waiting period (unlike the US 30-day rule), meaning the analysis is fact-specific and substance-based. Switching to genuinely different investments to maintain market exposure while crystallising a loss is a common approach, though the specific facts always matter. A registered tax agent can assess whether a particular arrangement falls within the bounds of legitimate tax planning.

Sources#

1. 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

1. Australian Taxation Office. (2024). Wash sale arrangements. https://www.ato.gov.au/businesses-and-organisations/income-deductions-offsets-and-records/deductions/wash-sale-arrangements

1. Australian Taxation Office. (2024). Part IVA general anti-avoidance rules. https://www.ato.gov.au/businesses-and-organisations/income-deductions-offsets-and-records/in-detail/avoidance/part-iva-the-general-anti-avoidance-rule-for-income-tax