Capital loss
The shortfall when you sell an asset for less than its cost base, usable only against capital gains.
A capital loss arises when an asset sells for less than what you paid including costs. Unlike most deductions, it cannot be offset against your salary or other ordinary income.
Capital losses can only reduce capital gains. If you have no gains this year, the loss is carried forward indefinitely until a year when you do, which makes it a stored asset rather than a wasted one.
The order of operations matters. Losses are applied to your gross gains before the 50% CGT discount is calculated, so using a loss against a discounted gain effectively costs you more of the loss than people expect.
Offsetting a gain with a stored loss
You carry forward a $15,000 loss from a bad share year. This year you make a $40,000 gain on property held over 12 months. Subtract the loss first to get $25,000, then apply the 50% discount, leaving $12,500 taxable.
The bit people get wrong
You cannot create a loss by selling and immediately rebuying the same asset to crystallise it. The ATO treats artificial arrangements with no purpose beyond a tax benefit as wash sales and disallows the loss.
Common questions
Do capital losses expire?
No. They carry forward indefinitely until you have a capital gain to apply them against, provided you declare them in your return in the year they occur.
Can I offset a capital loss against my salary?
No. Capital losses can only be applied against capital gains. This is the key difference from an investment loss under negative gearing, which does reduce your ordinary income.
What happens to losses on collectables?
Losses from collectables such as art or jewellery can only be applied against gains from other collectables, not against gains on shares or property. They are quarantined into their own pool.
Run your own numbers