Capital Loss Set-Off Rules Australia: CGT Guide & Examples for 2026

Updated June 15, 2026 by Eduyush Team

Australian CGT · Tax Planning Guide

Capital Gains Loss Set-Off: Applying Losses in the Right Order

How to apply capital losses in the right order to minimise the tax you pay — the rules, the strategy and worked examples for 2025–26.

Financial year 2025–26 · Last reviewed June 2026 · Sources: ATO, ITAA 1997

FY 2025–26 50% CGT discount Item 18 labels Losses carry forward

Quick answer

Capital losses can only ever offset capital gains — never ordinary income. They must be applied in a specific order: current-year losses first, then prior-year losses starting with the oldest. Critically, losses come off the gain before the 50% CGT discount is applied, not after — and within a year they should hit non-discounted ("other method") gains first. Applying them in the wrong order costs real money.

Key takeaways

  • Ring-fenced to gains. A capital loss can't touch salary, rent, dividends or interest — only capital gains.
  • Order is fixed. Current-year losses before prior-year; prior-year oldest-first; you can't cherry-pick.
  • Losses before the discount. The loss comes off the full gain, then the 50% discount applies to what's left.
  • Spend losses where they're worth most — against "other method" gains first ($1 of loss saves $1), discount gains last ($1 saves 50c).
  • Collectables are quarantined — collectable losses only offset collectable gains. Losses never expire.

FoundationsThe four golden rules of capital losses

1

Losses only offset gains — never ordinary income

A capital loss cannot reduce your salary, rent, dividends or any other income. It lives in a ring-fenced pool and can only absorb capital gains.

2

Current-year losses go before prior-year losses

This year's losses must be applied first. You cannot choose to save current-year losses and use older ones instead.

3

Prior-year losses must be used oldest first

Carry-forward losses must be applied in the order they arose. You cannot cherry-pick which year's losses to use — oldest goes first.

4

Losses apply before the 50% discount — always

When offsetting a discount-eligible gain, the loss comes off the full gain before the 50% discount applies. There's no way around this.

♾️

No time limit on carrying losses forward

Unused capital losses carry forward indefinitely — there's no expiry date. A loss made in 2010 can still offset a gain made in 2035. They never disappear unless used.

This is where the money isThe correct order to apply losses

Priority 1 — apply losses here first

"Other method" gains

Assets held less than 12 months. No discount applies. Loss and gain are both measured at face value.

💡 Best place to burn losses — $1 of loss saves $1 of gain, both at full marginal rate. Maximum value from every dollar of loss.

e.g. shares bought in January, sold in September

Priority 2 — apply remaining losses here

Indexation method gains

Assets acquired before 21 Sept 1999 and held 12+ months. Cost base inflated by CPI to Sept 1999 — no further discount.

⚖️ Middle ground — loss offsets at full value, but the indexed cost base already reduces the gain. Better than discount gains, worse than "other".

e.g. property bought in 1995, sold now

Priority 3 — last resort

Discount method gains

Assets held 12 months or more (acquired after 21 Sept 1999, or chosen over indexation). Gain is halved after losses.

⚠️ Least efficient — $1 of loss offsets $1 of gain, but that $1 was only going to be taxed on 50 cents. Save these for last.

e.g. shares held 2 years, property held 5 years

The critical ruleLosses apply before the 50% discount

Does the loss go against the full gain or the discounted gain?

Law: ITAA 1997

✅ Correct — how the law actually works

Full capital gain$10,000
Less: capital loss applied here ↓− $4,000
Net gain (before discount)$6,000
50% CGT discount applied× 50%
Assessable capital gain$3,000
✓ $3,000 added to taxable income

❌ Wrong — this is NOT how it works

Full capital gain$10,000
50% CGT discount applied first× 50%
Discounted gain$5,000
Less: capital loss (if applied here)− $4,000
This is NOT permitted$1,000
✗ Not allowed by law — losses go before discount

Right vs wrong orderWorked examples

Example 1 — Trish

Capital loss $5,000 · Other gain (under 12 months) $3,500 · Discount gain (12+ months) $6,000

✅ Correct order — loss to "other" gain first

Step Discount gain Other gain Loss left
Starting position $6,000 $3,500 ($5,000)
1. Apply $3,500 → Other gain $6,000 $0 ($1,500)
2. Apply $1,500 → Discount gain $4,500 $0 $0
3. Apply 50% discount to $4,500 $2,250 $0 —
Net capital gain (Item 18A) $2,250
✓ $2,250 added to taxable income

❌ Wrong order — loss to discount gain first

Step Discount gain Other gain Loss left
Starting position $6,000 $3,500 ($5,000)
1. Apply $5,000 → Discount gain $1,000 $3,500 $0
2. Apply 50% discount to $1,000 $500 $3,500 —
3. Total: $500 + $3,500
Net capital gain (Item 18A) $4,000
✗ $4,000 added to taxable income — $1,750 more!
$1,750 difference
in assessable income — same losses, same gains, just a different order. At a 37% marginal rate that's $647 extra tax for getting the order wrong.

Example 2 — Charles (with indexation choice)

Capital loss $7,000 · Other gain $4,500 · Pre-1999 asset: $6,000 (discount) OR $3,600 (indexed)

Charles has a pre-21 September 1999 asset, so he can choose either the discount method OR the indexation method. He must calculate both to find which gives the better result after losses are applied.

Option A — discount method (50% off after losses)

Step Discount gain Other gain Loss left
Starting $6,000 $4,500 ($7,000)
1. Apply $4,500 → Other gain $6,000 $0 ($2,500)
2. Apply $2,500 → Discount gain $3,500 $0 $0
3. Apply 50% discount $1,750 $0 —
Net gain $1,750

Option B — indexation method (cost base inflated by CPI)

Step Indexed gain Other gain Loss left
Starting $3,600 $4,500 ($7,000)
1. Apply $4,500 → Other gain $3,600 $0 ($2,500)
2. Apply $2,500 → Indexed gain $1,100 $0 $0
3. No discount applied $1,100 $0 —
Net gain $1,100
Indexation wins — $1,100 vs $1,750
Charles should choose indexation. The inflated cost base reduces the gain enough that no 50% discount is needed to beat the discount method. Always calculate both before deciding.

Special ruleCollectables are ring-fenced

🎨

Collectable losses can only offset collectable gains

Capital losses on collectables are quarantined — they cannot offset gains on shares, property or any other general asset. They can only absorb gains from other collectables, now or in future years.

Collectables include: paintings, sculptures, jewellery, antiques (100+ years old), coins, medallions, rare folios, manuscripts, postage stamps, first-day covers.

Collectable losses
Art loss $8,000
Jewellery loss $3,000
Coin collection loss $2,000
→ only →
Collectable gains only
Art gain
Antique gain
Stamp gain
✗
Cannot offset these
Share gains
Property gains
Crypto gains
Business asset gains

Lodgement · Item 18Where it goes on your tax return

18G
CGT event occurred?
Print Y if any CGT event happened during the year — including receiving a trust distribution containing a capital gain.
18H
Total current-year capital gains
The gross total of all gains before any losses or discount. The "before" number.
18A
Net capital gain
The final assessable amount after losses and discounts. This goes into taxable income.
18V
Net capital losses carried forward
Losses not used this year — carried forward indefinitely. No time limit. Track these year to year.

Adviser playbookTax planning strategies

🎯 Strategy 1 — Trigger gains in the same year as carry-forward losses

If a client has accumulated carry-forward losses sitting unused, that's the ideal year to trigger gains on appreciated assets — the loss absorbs the gain at zero tax cost. The loss is "free" in any year it's used; in a year with no gains it simply keeps carrying forward. Time the sale of profitable assets to coincide with years where losses exist.

🎯 Strategy 2 — Hold assets for 12 months to access the 50% discount

An asset held one day less than 12 months uses the "other method" — no discount, full gain taxed. The same asset held one more day qualifies for the 50% discount. At a 37% marginal rate, on a $50,000 gain that one day is worth $9,250 in tax. Always check the holding period before advising a sale.

🎯 Strategy 3 — Apply losses against "other method" gains first, always

When a client has both short-term and long-term gains plus losses available, always apply losses to the short-term (other method) gains first. A $1 loss against an "other" gain saves $1 of fully-taxable income. That same $1 against a discount gain only saves 50 cents (the gain would have been halved anyway). The loss is worth twice as much against an "other" gain.

🎯 Strategy 4 — For pre-1999 assets, always calculate both discount and indexation

Don't assume the 50% discount is always better for assets acquired before 21 September 1999. When losses are involved, indexation can produce a smaller net gain. The key variable is how much the cost base inflates under indexation — the greater the inflation factor, the more likely indexation wins. Most tax software calculates both; check before finalising.

"Think of your capital losses like a shopping voucher that only works in one department store, never the supermarket."

Your losses can only be spent on capital gains — never on your salary or interest. Inside that store, spend the voucher on the most expensive full-price item (the "other method" gain taxed at 100%) before the item that's already half price (the discount gain). Same voucher, twice the value in the right aisle.

FAQFrequently asked questions

Can I offset a capital loss against my salary or business income?

No. Capital losses can only be applied against capital gains, never against ordinary income such as wages, business income or interest. If your capital losses exceed your capital gains in a year, the excess is carried forward to offset future capital gains — it cannot reduce other assessable income.

What order must I apply capital losses in?

Current-year losses must be applied first, then prior-year losses starting from the oldest year. Within each year, apply losses against "other method" (non-discounted) gains first, then indexation method gains, and finally discount method gains last — because a loss against a discount gain only reduces taxable income by 50 cents per dollar, whereas the same loss against an "other method" gain saves the full dollar.

Why does it matter whether I apply a loss to a discount gain or an other-method gain?

A capital loss applied to a non-discounted gain saves you the full dollar in assessable income. A loss applied to a discount gain reduces the pre-discount amount — but after the 50% discount, only 50 cents of that dollar reduction flows through to taxable income. The order matters significantly, especially when losses are limited.

Are collectables losses treated the same way?

No. Losses from collectables (art, jewellery, antiques, coins, stamps) are ring-fenced — they can only be applied against gains from collectables. They cannot offset gains from shares, property or other CGT assets under any circumstances.

How long can I carry forward a capital loss?

Indefinitely. There is no time limit on carrying forward a capital loss. Prior-year losses carry forward until fully applied against future capital gains, and the oldest losses must be used first — you cannot apply newer losses in preference to older ones.

Disclaimer

General information only — not financial, tax or legal advice. Figures reflect 2025–26 rules as compiled here; verify all details at ato.gov.au or consult a registered tax agent before lodgement.

Australian CGT — Loss Set-Off Guide · Sources: ITAA 1997, ATO guidance

Item 18H = gross gains · Item 18A = net gain after losses & discount · Item 18V = losses carried forward

For adviser reference — verify against current ATO guidance before lodgement.

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