This would force them to take up citizenship in the birth country of their parents or parent, Immigration Minister Peter Dutton said.
Australia can currently only revoke citizenship if an Australian citizen joins the armed forces of another country to fight Australia.
Because the Islamic State movement is not recognised as a state, membership is not a ground for losing Australian citizenship.
But Dutton described Islamic State fighters as a "huge threat to Australian citizens".
He said: "I can hardly walk down the street without people saying: 'Why do you let these people back into our country?
"They come back more radicalised."
The Australian constitution makes no mention of citizenship, which means that Parliament could change the law without any constitutional obstacle.
Two weeks ago the 17-year-old son of a Syrian-born doctor became Australia's latest accused terrorist.
Police allege he had three pipe bombs concealed at the house and was planning an attack soon.
The teen, whose name cannot be released, became the 23rd suspect charged with terrorism-related offences in the country since September.
Some 250 Australians have joined Sunni militants in Iraq and Syria, according to experts.
Last year senior Tory backbencher David Davis called for British jihadists to be stripped of their citizenship.
He said: "[Isis] is claiming to be a state.
"They can issue these young men with Islamic State passports if they so wish.
"It is not our problem that they would have trouble getting into any civilised country with them."
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