Speaking Mathanese: Investment Income

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Welcome back to another edition of "Speaking Mathanese," our Motley Fool series that tackles financial math myths and deconstructs the computations that make the biggest difference to your bottom line.

Our quest to make you smarter than a fifth-grader this week has us tossing tax-loss selling overboard to make room for your investment income.

The myth
Do you remember our quiz? To recap, I asked you to figure your total capital gains liability after combining these gains:

Company	Capital Gain
Amazon	$3,071.00
Boeing	$1,109.00
Microsoft	$670.00
Procter & Gamble	$520.00
Volcom	$1,792.00
TOTAL	$7,162.00

With these losses:

Company	Capital Loss
KB Home (NYSE: KBH)	$926.00
Panera Bread (Nasdaq: PNRA)	$1,329.00
RealNetworks (Nasdaq: RNWK)	$247.00
Sirius Satellite Radio (Nasdaq: SIRI)	$80.00
The Children's Place (Nasdaq: PLCE)	$1,448.00
TOTAL	$4,030.00

So we just subtract total losses from total gains, right? Right?!?

The math
Nope. We have to identify which gains and losses are short-term and which are long term. Only then can we add and subtract.

Here, we assumed that Amazon and Boeing were long-term gains (held for at least one year plus one day) and that Microsoft, Procter & Gamble, and Volcom were short-term gains (held for a year or less).

We also assumed that KB Home and Panera Bread were long-term losses (realized after a year plus a day), and that RealNetworks, Sirius, and The Children's Place were short-term losses (realized in a year or less).

Now, here's the Mathanese:

[($3,071 + $1,109) - ($926 + $1,329)] + [($670 + $520 + $1,792) - ($247 + $80 + $1,448)]

Your answer should be $1,925 in net long-term gains, and $1,207 in net short-term gains.

But you wouldn't combine these numbers for filing your tax return. Instead, because short-term gains are taxed at a higher rate, you'd have to segregate the totals. For more on how this works, check in with the experts at our tax strategies discussion board.

In the meantime, here's a question to ponder for next week's lesson: What happens if your realized losses significantly outweigh your gains? Hint: it involves (surprise!) more Mathanese.

Questions? Submit them here.

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Amazon is a Stock Advisor selection. Microsoft is an Inside Value recommendation. Volcom is a two-time Motley Fool Hidden Gems pick.

Fool contributor Tim Beyers writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Find his portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy is lobbying its local school district for a course in beginning Mathanese.