Tax-Loss Harvesting and Wash Sales (Australia): Where the ATO Draws the Line

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.

Law update (15 July 2026): the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 is now law. From 1 July 2027 it changes the order in which current-year and carried-forward capital losses reduce capital gains. It does not create a US-style waiting period or make a manufactured wash sale acceptable.^⁴

Related (useful context):

• Capital gains tax basics
• CGT parcel selection
• Carry-forward capital losses

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.

This simplified example assumes the gain is fully assessable and ignores the CGT discount, the post-1 July 2027 indexation rules and the 30% minimum tax. In practice, losses are applied before those later steps in the CGT calculation.

What Changes From 1 July 2027#

For the 2027–28 income year and later years, current-year capital losses must reduce gains in this order:

1. deferred non-residential gains (such as the pre-reform component of a later share or ETF sale)
2. deferred residential gains
3. non-residential gains (such as the post-reform component of a share or ETF sale)
4. residential gains

Previously unapplied net capital losses are then used in the same order. Within a category, the taxpayer can choose which gain to reduce first.^⁴

The change means a harvested share or ETF loss may be absorbed by a deferred pre-reform gain before it reaches a post-reform gain that could otherwise be subject to the 30% minimum tax. Tax planning therefore needs to model the statutory order rather than assuming the loss can be directed to whichever gain produces the largest saving.

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:

• Trade date: for an ordinary disposal under a contract, CGT event A1 generally happens when the contract is entered into, not when settlement occurs. For an on-market share or ETF sale, confirm the trade date and keep the contract note rather than assuming T+2 settlement determines the tax year.^⁵
• 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 can be legitimate when it reflects a genuine economic disposal, while arrangements designed to manufacture a loss without a real change in exposure can attract the ATO's wash-sale or anti-avoidance rules. Australia still has no fixed 30-day rule. From 1 July 2027, the 2026 Act adds a mandatory order for applying losses across four categories of gain, so a realised loss cannot simply be directed to whichever gain produces the best result. Keep the commercial rationale, trade confirmation, parcel selection and complete cost-base records, and use a registered tax agent for material transactions.