Crystallization

DEFINITION of crystallization

Crystallization is when a trader or business closes a position and then reopens an identical position immediately.

WHAT IT IS IN ESSENCE

It is when a trader buys a capital asset, an increase (or decrease) in the value of the security does not translate to a profit (or loss).

On the Forex market, it is also selling and buying foreign exchange almost immediately.

The trader can only make claim to a profit (or loss) after selling the security.

Selling the security at a profit refers to as crystallizing a capital gain. Which means that trader is able to balance out the net value of some assets. But by quickly realizing a loss or profit. And without losing the position that trader believes can still bring more profit.

That is the act of selling an asset and immediately buying the same asset back. One does this for tax purposes. On the other words, one sells the asset in order to realize a capital loss but buys it back because one believes it still represents a solid investment.

Crystallization also is the fixing of a floating charge on assets. The company may continue trading and dispose of any assets in the course of that business. If the company defaults on its obligations under the terms of the loan agreement, the charge will crystallize. That is, immediately attach to the assets owned by the company at that time. Crystallization is, therefore, the process by which a floating charge becomes fixed on to particular assets.

HOW TO USE

Mostly this is done for tax purposes: allowing a trader to realize a capital loss and pay any charges on it immediately.

Crystallization is useful as a strategy in selling and buying stocks. Almost instantaneously in order to increase or decrease book value.

An example of this occurs when an investor needs to take a capital loss for a particular stock but still believes the stock will rise.

Most countries have tax regulations in place to prevent the practice of crystallization.