Deliberately realising losses to offset gains is legitimate, but Part IVA still polices the line.
Tax loss harvesting is one of those slightly intimidating-sounding ideas that is actually quite simple. If you have realised capital gains during the year, or are likely to in future, deliberately selling investments that are in a loss position can offset some of those gains and reduce your tax. Australia has no statutory wash-sale rule, which is why the practice is common here, but there is a line the ATO can still police using its general anti-avoidance rules. This guide is general information, not tax advice.
You are not creating a loss when you sell at a loss; the loss is already there in your portfolio's market value. Harvesting is just choosing the moment to realise it for tax purposes. When you sell an asset at less than its cost base you trigger a CGT event, and the capital loss can be offset against capital gains in the same year. If you have no gains, the loss carries forward indefinitely. The ATO's working out your capital gain or loss pages set out the mechanics.
In the United States there is a specific statutory rule that disallows a loss if you buy back the same or a substantially identical security within 30 days. Australia does not have that rule. But Australian tax law has a general anti-avoidance provision known as Part IVA, which lets the ATO cancel a tax benefit obtained from a scheme where the sole or dominant purpose of the arrangement was to get that benefit. The ATO has publicly described wash sales as a Part IVA concern, particularly where the practical effect is that the investor keeps the same economic position while harvesting a paper loss.
Part IVA does not have a fixed time period or a bright-line test. Instead it considers a range of factors: the manner in which the scheme was entered into, the form and substance of the steps, the timing, the result for the taxpayer, and any change in their financial position. Selling a losing share and buying it back the same afternoon, with no real change in exposure or risk, is far closer to Part IVA territory than selling because you have lost faith in the investment and choosing not to repurchase at all.
| Scenario | Risk level |
|---|---|
| Sell loser to genuinely exit; do not repurchase | Low |
| Sell loser and switch to a different but related exposure | Lower than identical repurchase |
| Sell loser and immediately repurchase the same security | Higher: classic wash sale concern |
| Pre-planned sell/repurchase coordinated to generate a loss | Highest: clear Part IVA territory |
If you are using tax loss harvesting as a real strategy, a few principles reduce risk. First, lead with the investment reason. If you would have sold the asset anyway, the loss is incidental rather than the point. Second, change your position meaningfully if you want to stay exposed; for example, rotating between two genuinely different funds rather than buying back the identical security. Third, be patient with the timing; rushed back-to-back trades stand out. Fourth, document the decision so that if asked, you can explain why you made each move at the time.
Capital losses can only offset capital gains, not your salary or other ordinary income. Within capital gains, losses are applied before the 50% CGT discount, and many taxpayers prefer to apply losses against non-discountable gains first so that the discount can continue to apply to as much of the remaining discountable gain as possible. Any unused net capital loss carries forward indefinitely until you have future capital gains to apply it against.
Loss harvesting can be powerful if you have realised gains in the same year and your marginal tax rate is reasonably high, because the offset directly reduces your tax bill. It is less useful if you have no current or near-term gains, because the benefit is deferred until you eventually do. It is rarely worth doing if the trading costs, market timing risk or stamp-related costs (for example for direct property) wipe out the value of the tax benefit. As with any tax-driven decision, a quick spreadsheet beats a hunch.
A lot of loss harvesting happens in May and June for a simple reason: investors want to know what their gains look like before they decide whether to realise offsetting losses. For listed securities, the CGT event date is the trade date, not the settlement date, so a trade executed in late June still falls in that financial year even though settlement happens the following week. Plan around that, not around settlement. For property, the CGT event for a sale is generally the contract date, which is another reason to start planning before the calendar runs out.
Tax loss harvesting is a tool, not a strategy on its own. Most investors use it as a tidy-up at the end of the year: looking across their parcels, identifying genuine losers they were minded to exit anyway, and realising those losses to offset gains they have already realised. Used that way it is uncontroversial and effective. Used as a standalone strategy of selling and immediately repurchasing the same security to manufacture a deduction, it is exactly the behaviour the ATO has flagged as a Part IVA risk. The difference, again, is whether the investment decision drives the tax outcome or the other way around.
A few situations need extra care. Spouses cannot get around the issue by one selling and the other buying back the same security if the arrangement is coordinated; the ATO can look at the substance. Self-managed super funds can do loss harvesting, but related-party rules, in-house asset rules and the sole purpose test all apply, and getting it wrong inside super has bigger consequences. Trust structures have their own rules around loss recoupment. Specific advice is sensible whenever the structure is not a straightforward individual investor.
Disclaimer: This article is general information, not tax or financial advice. Part IVA is fact-driven, and outcomes can vary considerably. See the ATO CGT pages and consider qualified advice before adopting a deliberate loss-harvesting strategy.