"Lossless" in this context means CD-quality audio (16 bits per sample, 44.1 KHz sampling rate) with none of the information thrown away. AAC is "lossy". Like MP3, it throws away information to obtain smaller file sizes – and when you play or decode the compressed file, you do not get full quality back.
In Music, if you go into File > Settings…, select the Files tab, and click the Import Settings… button, an Import Settings dialog comes up. The Import Using pop-up menu has five options:
- AAC encoder
- AIFF encoder
- Apple Lossless Encoder
- MP3 encoder
- WAV encoder
AIFF, WAV, and Apple Lossless are lossless encoding methods. They will keep 16-bit, 44.1 KHz data "as is", and not throw any of it away. The AIFF and WAV methods do no compression, and will produce very large files. The Apple Lossless method, will do compression – but because it will not throw away information, it can't compress music as much as AAC and MP3 can.
There may also be an option to change the encoding method at the time that you import music from an audio CD.