# Calculating Capital Gains and Capital Losses

by If you sell an investment such as a stock or mutual fund in a taxable investment account, then you might have to pay capital gains taxes on any profit that you make.� This does not apply to a tax-deferred retirement accounts such as 401(k) plan and Roth IRAs.

If you make a profit on the investment then you will have a capital gain which is taxable.� If you lose money, then you will have a capital loss which is not taxable but can be used to offset capital gains if you have any.

### Capital gain

A capital gain is the difference in the selling price of an investment and the purchase price minus transaction costs, if you sell for a higher price than you bought it at.

For example, let�s say you bought a mutual fund on the advice of the genius kid next door for \$5,000 with a transaction cost of \$50 and then sold it for \$7,000 with a transaction cost of \$50.� Since your selling price is higher than your purchase price, this will result in a capital gain.

To calculate the capital gain, you subtract the purchase price and transaction costs from the sale price.

Capital gains = sale price � purchase price – transaction costs

= \$7,000 – \$5000 – \$100

= \$1,900

### Capital loss

What happens if the hot stock tip you heard at the coffee shop turned out to be a dud and you lost money?� In that case you will have a capital loss because you sold the stock for less than you paid for it.

For example if you buy an investment for \$10,000 with a transaction cost of \$25 and sell it for \$9,200 with a transaction cost of \$25.

Capital loss = sale price � purchase price – transaction costs = \$9,200 – \$10,000 – \$50 = -\$850.

You might notice that the formula is the same for both losses and gains.� If the answer is negative then you have a capital loss.� If the answer is positive then you have a capital gain.

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