# Crystallisation definition

## What is crystallisation?

Crystallisation means selling an asset in order to realise capital gains or losses. When an investor buys an asset, any increase or decrease in the market price will not automatically translate to profit or loss – this is only realised after the position has been closed.

Once the position has been crystallised, investment tax will apply to the proceeds, so investors might strategically crystallise their positions. Although capital gains are taxable, capital losses can be offset against any profits to reduce the tax paid at the end of the year.

Crystallisation itself not an issue, but there is contention surrounding what the investor does after crystallising a position. The problem lies in the act of an investor, trader or a business, closing their position and opening an identical position immediately. In doing so, they are able to balance out the net value of their assets by quickly realising a loss or profit, without losing the position that they believe can still bring more profit.

However, most countries have tax regulations in place to prevent this practice from occurring – such as not being able to claim tax deduction if you have bought the shares within 30 days.

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## 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.

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