Capital Losses and Income losses A capital loss is different to an income loss. Capital losses may result from buying capital assets and selling them without a profit being made. This can still occur when you sell for more than you buy. Buy a house for $500,000 and selling it later for $510,000 may result in a capital loss once stamp duty and sales fees are taken into account. Income losses may result from having more expense deductions than income. An employee with a large portfolio of negatively geared property may end up with a negative income. The main thing to be aware of is that capital losses can only be offset by capital gains. A capital loss cannot be used to reduce your income. Example 1 Dymphna buys a property in a mining town for $1,200,000 and later sells it for $800,000. This results in a capital loss of $450,000 once costs are taken into account. Dymphna also earns $100,000 per year from work. If Dymphna has no capital gains, the loss will be carried forward to the next year and her taxable income will still be $100,000 from work. She won’t save any tax in this situation as the loss cannot reduce her taxable income. Example 2 Bob is a share investor. He is new at this and has lost $100,000 in ‘trading’ shares. Bob also earns $120,000 per year as a brain surgeon. If Bob is an investor, that $100,000 loss will be a capital loss and cannot be used to offset his income. But if Bob is a share trader than that $100,000 will be an income loss which would be used to offset this other income like this: $120,000 plus -$100,000 = $20,000 Bob would pay no tax on his income for this year if that were the case. (the circumstances of the trading will determine whether Bob is a trader or an investor).