What is crystallisation?
Crystallisation means selling an asset in order to realize 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 realized after the position has been closed.
Once the position has been crystallised, investment tax may be applicable to the proceeds, which is why investors might choose to strategically crystallise their positions. However, 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.