Suppose we buy an investment for $1,000, including buying expense, and sell it for a net of $1,500, after deducting selling expense. Customarily we say we have a profit, before tax, of $500; and if we pay a 15 percent Federal capital-gain tax of $75, our profit after this tax is $425. Suppose we paid $1,000 for an investment in 1940 and sold it for $1,500 in 1957. So by selling then for $1,500, we had a loss in buying power of $500. So even after paying a revenue tax of 15 percent of $2,000, or $300, the sale looks profitable, provided we consider that the sale closes the transaction.


But ordinarily when a man sells an investment, rather than spending the proceeds he uses them to buy another investment. Suppose we reinvest by again buying the same number of shares of X stock as before, and the cost of the new stock equals what we received for the old stock, $3,000. What matters is the cost of the new investment, the replacement cost, compared to the selling price of the old one.

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