The gain/loss calculation is performed over the entire account balance, not any particular subset of investments in the account. The performance of any one investment by itself is only relevant in how it contributes to the overall performance of the account.
In your example, the account opening balance is $17,000 and the account closing balance is $20,000. That means that the $7,000 plus the attributable gain is simply:
$7,000 * $20,000 / $17,000 = $8,235.29
So $8,235.29 of value is the amount that must be moved from the Roth IRA to the traditional IRA to accomplish a recharacterization of the $7,000 contribution. It doesn't matter what investments in the account are moved in kind, or sold and the cash moved, to accomplish the movement of $8,235.29 of value. The result is a recharacterization of $7,000 of your 2024 contribution. (You are recharacterizing $7,000, not $8,235.29; $8,235.29 is the adjusted amount transferred.)
The Form 1099-R will have $8,235.29 in box 1 and $0 in box 2a and code R in box 7. Your explanation statement required to be included with your 2024 tax return will need to show that you recharacterized your entire $7,000 contribution and $7,000 plus an attributable gain of $1,235.29 was transferred from the Roth IRA to the traditional IRA to accomplish this.
It's usually simplest to do the transfer in cash by selling in the Roth IRA whatever shares you choose to sell, transfer the $8,235.29 in cash, then use the $8,235.29 of cash in the traditional IRA to purchase whatever you want.
