Let us break down Capital Gains for you. Simply, if you sell an asset for less than what you buy it for then, it's a loss. Because it's an "asset" it is now termed a Capital loss.
You would think that because you've made a loss, that you can quite readily deduct it from other sources of income. However, with Capital Losses there are certain restrictions as to what you can deduct it against.
Capital losses can’t be offset against employment income
First of all, capital losses can’t be offset against employment income. According to the Australian Taxation Office, capital losses can only be offset against capital gains, not against income from other sources like your salary. This is because capital losses and gains are fundamentally different from regular income and expenses.
What can capital losses be offset against?
The answer is capital gains. If you sell an asset and make a profit, that’s a capital gain. If you sell at a loss, that’s a capital loss. You can use your capital losses to reduce your capital gains, thereby reducing your overall tax liability.
Capital Losses can be carried forward.
You may have made a Capital Loss in the current tax year. As you now know you cannot offset that loss against normal income and can only be offset against Capital Gains. If you've made some capital losses in the current year and no capital gains, the capital losses will caryy forward from year to year until such time as they are absorbed.
Let’s look at some real-world Capital Loss examples:
You sell shares at a loss, but you also have gains from selling a rental property. You can use the capital loss from the shares to offset the capital gain from the property.
You sell an investment property at a loss, but you have gains from selling shares. Again, the capital loss can be used to offset the capital gain.
You sell a collectable (like a piece of art) at a loss, but you have gains from another collectable. The capital loss from the first collectable can offset the gain from the second.
A capital loss crystallises, or becomes a reality, when you dispose of a capital asset for less than its tax value. This could happen when you sell an asset, like shares or property, for less than what you paid for it.
Managing capital losses and gains can be complex. It’s always a good idea to use a trusted platform like gotax.com.au to complete your income tax return and Deduction Grabber to record your tax transactions. Stay informed, stay ahead!
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