Paper Profit (Paper Loss)

When you buy shares, property or other assets, their value moves every day. If the value rises, you are better off on paper, but you have received no money.

Until you sell, the profit is unrealised, which means it exists only as a calculation and not as cash in your account. The distinction matters because the two kinds of result are treated differently.

Realised profits are usually taxable when the asset is sold, whereas paper profits are often not taxed until then, although some accounting rules require companies to include certain unrealised gains in their reported results. Always check how your own accounting standard or tax system treats them.

In business, paper profits appear in investment portfolios, in holdings of property or financial instruments, and in assets that are revalued each period. A company that holds shares in another firm might report a gain at the end of the year even though it has not sold a single share.

Readers of the accounts should look at how much of the profit is realised cash and how much is a valuation. Paper gains are fragile.

Markets can reverse quickly, and a large gain can vanish before the owner decides to sell. Many investors use rules such as taking some profit when a holding has risen by a set amount, or setting a stop-loss order (an instruction to sell if the price drops to a chosen level).

There is also a psychological side. People often feel richer when they see a paper profit and spend more, or they refuse to sell a paper loss because selling would make the loss feel real.

Managers can fall into the same traps, so decisions should rest on future prospects and not on the original purchase price. A paper loss can still matter for planning even when no cash has left the business.

Lenders may look at the value of pledged assets, and a sharp fall can trigger a demand for extra security. A company should therefore monitor its unrealised positions as well as its cash.