Investing is about more than just growing wealth—it’s also about managing tax effectively. Tax-loss harvesting is one of the most effective strategies for tax optimisation, allowing investors to offset capital gains and lower their overall tax liability. It can be notably effective for those with diversified portfolios, especially when markets fluctuate.
Today, we’ll explain how this strategy works and when to apply it. We’ll also share several details to consider to ensure you comply with Australian tax regulations while implementing this tax strategy.
What Is Tax-Loss Harvesting?
Tax-loss harvesting entails selling underperforming assets to offset capital gains tax (CGT) from other investments. The goal isn’t to exit the market but to balance gains and losses to boost tax outcomes.
Here’s how it works:
- Sell an asset that has decreased in value – The realised capital loss can be used to lower your taxable capital gains.
- Apply losses against capital gains – This offsets tax on profitable investments.
- Reinvest in a similar asset – This keeps your portfolio balanced while maintaining market exposure.
Note that Australian capital losses can only be offset against capital gains—not regular income. If losses exceed gains in a financial year, they can be carried forward indefinitely to reduce future capital gains.
How Does Tax-Loss Harvesting Lower Tax Liability?
Capital gains tax (CGT) is applied when selling an investment for a profit. However, by selling underperforming assets at a loss, investors can lower their taxable gains. In a nutshell, it helps:
- Offset Gains from Profitable Investments – If a stock, ETF, or property is sold at a profit, CGT applies. Selling another asset at a loss can balance out that tax burden.
- Reduce CGT on High-Income Years – If a major asset is sold in a high-income year, tax-loss harvesting can decrease the total taxable amount.
- Carry Forward Losses for Future Gains – Unlike capital gains, losses don’t expire. If losses exceed gains, they can be saved to reduce taxes in future years.
In Australia, assets held for more than 12 months qualify for a 50% CGT discount for individuals. As such, tax-loss harvesting is especially effective for high-income earners looking to manage tax efficiently over the long term.
When Should Tax-Loss Harvesting Be Used?
Tax-loss harvesting is most beneficial when there are significant fluctuations in the market or when you have realised gains that would trigger a higher tax liability. With that in mind, consider using tax-loss harvesting at the following times:
1. Before June 30 (End of the Financial Year)
The best time to review unrealised losses is before June 30, the end of the Australian financial year. Investors looking to reduce tax on capital gains should assess their portfolios in the weeks leading up to this date.
2. Market Downturns
If an asset’s value drops significantly, selling it may help offset gains elsewhere. Investors frequently rebalancing their portfolios may find this tax strategy remarkably practical.
3. Adjusting Investment Strategy
If a stock or fund underperforms and no longer aligns with your long-term financial goals, selling it at a loss can be a tax-efficient way to move into a better investment.
Important Tax-Loss Harvesting Rules and Limitations
While tax-loss harvesting can offer significant tax-saving opportunities, there are some vital rules and limitations that investors should be aware of to ensure they comply with Australian tax laws.
1. The “Wash Sale” Rule (ATO Anti-Avoidance)
Australia has strict rules around tax-loss harvesting. The Australian Taxation Office (ATO) prohibits “wash sales,” where an investor sells an asset at a loss and buys back the same or a “substantially identical” asset shortly after to claim a tax benefit.
So, if you’re considering tax-loss harvesting, avoid buying back the same stock or fund within a short period. If possible, switch to a similar but not identical investment (e.g., a different ETF in the same sector). Also, keeping an organised record of all transactions will help show compliance with ATO guidelines. We have more tips on how to stay compliant.
2. Losses Can Only Offset Capital Gains
As mentioned, taxable income in Australia can only be reduced by capital gains, not capital losses. If total losses exceed gains in a given year, the unused losses must be carried forward rather than deducted against other types of income.
Who Benefits Most from Tax-Loss Harvesting?
This approach is useful for:
- Investors with taxable assets such as shares, managed funds, ETFs, or investment properties.
- High-income earners looking for tax liability reduction.
- Those actively rebalancing and managing their portfolios
- Investors with significant capital gains who want to offset the tax impact.
Tax-loss harvesting is less relevant for investors holding assets in superannuation funds, as these accounts already offer tax benefits.
How to Apply Tax-Loss Harvesting in Australia
A structured approach can help you maximise the tax benefits without losing sight of your investment goals.
- Review Your Portfolio – Identify underperforming assets with unrealised losses.
- Calculate Potential Tax Savings – Compare total losses against capital gains.
- Reinvest in a Compliant Asset – Avoid ATO “wash sale” rules by acquiring a similar but not identical replacement.
- Keep Records for the ATO – Store transaction details, reasons for sale, and reinvestment choices to show compliance.
Also, a financial advisor or tax professional can offer personalised guidance based on your financial goals and tax situation. They can help you optimise tax strategies, manage investments, and make informed decisions for long-term financial success.
Get Tax-Loss Harvesting Advice from Financial Advisors
If you’re looking for expert guidance on tax optimisation, our experienced financial advisors at Taxology are here to help.
Whether you need assistance with tax-loss harvesting, asset rebalancing, or preparing for tax season, our team provides personalised advice to simplify tax management and keep your investments on track. Reach out to us to learn how we can support your financial journey.