Example of crystallisation
Let’s say an investor has 100 shares of company ABC, which were bought for £50 each in 2017. By the following year, the share price has increased dramatically to £180 per share – the capital gains would be (£180-£50) x 100 = £13,000. The investor decides to crystallise the position, meaning it is closed and their profit is realised.
The profit on this ABC position is subjected to tax, which is equal to the investor’s ordinary income tax rate. Due to their income bracket, the capital gains tax is 20% and so the investor would pay a sum of £2600 and take a profit of £10,400.
However, at the same time as their position on ABC shares, the investor also has a position on 50 shares of company XYZ. Although they bought the shares for £80 per share in 2017, they have since declined to £20 each – the capital loss is (£20-£80) x 50 = -£3000. The investor decides to crystallise the capital loss on the investment, to offset the capital gains tax.
Instead of reporting a capital gain of £13,000, the investor could subtract their capital loss, to give a figure of £10,000. The capital gains tax on this profit would be reduced, with the investor only paying £2000.