Tax Deduction For Short-Term Capital Losses

Tax Deduction For Short-Term Capital Losses

Tax season can be a confusing time, especially when it comes to capital gains and losses.

But fear not, smart Australian investors! If you’ve recently sold an investment at a loss, you might be eligible for valuable tax deductions through short-term capital loss claims.

This blog breaks down the need-to-know in clear, concise language, ensuring you understand your rights and maximise your refund.

What Constitutes a Capital Loss in Property?

A capital loss in Australia occurs when an asset, such as a property, is sold for less than its original purchase price.

This triggers a scenario where individuals can offset the capital loss against capital gains in future years.

Time Frame for Carrying Over Capital Losses

According to the Australian Taxation Office (ATO), capital losses can be carried forward indefinitely to offset future capital gains.

However, it’s crucial to note that these losses cannot be deducted from regular income, they solely offset capital gains.

The Significance of Offsetting in Carrying Over Capital Losses

Offsetting plays a fundamental role in the process of carrying over capital losses. It involves deducting current-year capital losses from capital gains in subsequent years.

This strategic utilisation of capital losses proves beneficial, allowing investors to potentially reduce their capital gains tax in future years.

Practical Examples For Clarity

Imagine these scenarios:

  • Scenario 1: You bought shares six months ago for $5,000 and sold them at a $2,000 loss. Later that year, you sell another investment for a $3,000 gain. You can deduct the $2,000 loss from the $3,000 gain, resulting in a taxable capital gain of only $1,000.
  • Scenario 2: You sell shares at a $1,500 loss but have no capital gains this year. No worries! Carry forward the loss to future years and deduct it against any capital gains you make then.

Carrying Over Capital Losses - What's The Process?

The process involves:

  1. Calculating the capital loss for the current financial year.

  1. Recording the capital loss on the tax return for that financial year.

  1. Carrying over the capital loss to future financial years by deducting it from any capital gains.

  1. Keeping meticulous track of cumulative capital losses for proper application in the correct order.

Calculating Capital Losses on Property in Australia

Understanding how to calculate capital losses on property is pivotal. The process involves:

  1. Taking the original cost base of the property.

  1. Deducting any capital works deductions related to construction costs.

  1. This gives a reduced cost base.

  1. Taking the capital proceeds from the sale of the property.

  2. Deducting the reduced cost base from the capital proceeds.

Capital Loss on a Primary Residence

It’s important to note that if a capital loss occurs on the sale of an individual’s primary residence, it is fully exempt from capital gains tax in Australia.

Common Mistakes to Avoid

Several mistakes can hinder the effective utilisation of carried-over capital losses, including attempting to deduct them from regular income, neglecting the correct order for the deduction, failing to maintain records, and not informing tax agents about incurred losses.

Key Takeaways on Carrying Over Capital Losses

  1. Capital losses can offset capital gains indefinitely.

  1. Net capital losses up to $6,000 can be deducted against other income.

  1. Accurate calculations, record-keeping, and diligent reporting in tax returns are essential.

  1. Distinctions exist between commercial and residential properties in terms of tax implications.

  1. Awareness of limitations and adherence to the process are crucial to avoid costly mistakes.

Key Considerations To Remember For Short-Term Capital Losses

While the above covers the core principles, remember these additional points:

  • Losses from personal use assets (like boats or furniture) and exempt assets (like cars) cannot be deducted.

  • Losses from collectables below $500 are disregarded, but higher-value losses can be deducted against collectable gains.

  • Company losses can be carried forward if the company remains under similar ownership and business.

  • Trust losses cannot be distributed to beneficiaries but can be carried forward by the trust itself.

FAQs on Carrying Over Capital Losses

Can capital losses be deducted from regular income?

No, capital losses can only be carried over to offset against capital gains in future years.

What strategies can be employed to minimise capital gains tax?

Strategic planning and timing of losses, offsetting gains with losses, and deducting net capital losses can help minimise capital gains tax.

Is a tax loss the same as a capital loss in Australia?

Tax losses and capital losses differ; tax losses can arise in income, while capital losses occur when selling assets.


We hope this guide provides you with valuable information, but remember it’s not personalised tax advice. For best guidance based on your unique circumstances, consider consulting a registered tax agent or accountant. And for this, you can rely on KPG Taxation. Their experts can help you handle the complexities and ensure you’re maximising deductions within legal boundaries.

Consulting with KPG Taxation

Focus On Growing Your Business, Leave The Accounting On Us!

  • Income Tax : File your taxes & get the best claims & returns.
  • Accountancy : Hire expert accountants to manage your transactions.
  • Bookkeeping : Let us handle your record books and expense reports.
  • Business Advisory : From company set-up to payroll, we handle it all.