What it means
If you buy shares at one price and they are now worth more, you have a paper profit. The gain exists in the price but not in your bank account.
If the shares are worth less than you paid, you have a paper loss, which is just as unrealised. The distinction matters because the price can change before you sell.
A paper profit can disappear overnight, and a paper loss can recover, so neither is final until the position is closed. In company accounts, the treatment depends on the asset.
Some investments are carried at market value, so paper gains and losses flow into the accounts even before a sale, while others stay at cost until sold. Finance teams need to know which rule applies because it affects reported profit.
Taxes usually work differently too. In many countries tax is due on realised gains only, so a paper profit does not normally create a tax bill until the asset is sold.
Behaviour is the other angle. People often feel richer when they see paper profits and may spend or take more risk, while paper losses can lead to panic or to holding on in the hope of getting back to even.
Investors often use the phrase when deciding whether to sell. Selling a winner locks in the gain but may trigger tax, while selling a loser realises the loss, which in some countries can be used to reduce tax on other gains.
These rules differ by country, so the after-tax result should be checked before any sale.
In practice
Real-world examples.
Example
A company holds $500,000 of shares in a listed supplier as a short-term investment. At quarter end the shares are worth $560,000. The accountant records a $60,000 gain because the investment is carried at market value. She notes the movement in the monthly report for the finance committee.
Example
A homeowner sees that similar houses on her street have sold for 15% more than she paid. She has a paper gain on her property, but it will only be real if she sells. Meanwhile, she still owes the same mortgage balance. She remembers that local prices can fall as well as rise before any sale takes place.
Example
A trader holds a futures position that is $4,000 down at the end of the day. The broker adjusts her account for the loss daily, so the paper loss turns into a cash call. The rules of the exchange turn her unrealised loss into a real payment. She must deposit the cash the same day.
Formula
Calculation
Paper profit or loss = (current price - purchase price) x quantity
An investor buys 2,000 shares at $25 each, paying $50,000. The price is now $31, so the paper profit is (31 - 25) x 2,000 = $12,000. Another investor bought 2,000 shares at $40, paying $80,000, and the price is now $31. Her paper loss is (40 - 31) x 2,000 = $18,000. If the first investor sells at $31, the profit becomes real; if the second never sells, her loss stays on paper.Case study
Seen in the real world.
Linden Foods is an illustrative, fictional company that invested $2,000,000 of spare cash in a portfolio of listed shares. By the end of the year the portfolio was worth $2,400,000, and the board was pleased with the $400,000 paper profit.
The finance director pointed out that the profit was unrealised and could vanish if markets fell. She also noted that the company's loan covenants were based on cash earnings, so the gain would not help meet them.
In the illustrative outcome, the board sold half of the portfolio to bank $200,000 of the gain and kept the rest invested. The lesson was that paper gains are a measure of value, not of cash, and decisions should consider both. She also asked the investment team to report realised and unrealised results in separate columns each quarter, so that the board always saw how much of the profit was in cash.
Watch out
Common mistakes.
- Treating a paper profit as money in the bank, when it can fall or disappear before the asset is sold.
- Refusing to sell a losing investment to avoid recording a loss, even though the value has already fallen.
- Assuming tax is due on paper profits, when in many countries it arises only when the gain is realised.
Questions
People also ask.
Is a paper profit the same as an unrealised gain?
Yes, they mean the same thing, as both describe a gain on an asset that has not yet been sold. The term is mainly used by investors, while accountants usually prefer unrealised gain or loss.
Do paper losses affect company accounts?
They can, if the asset is carried at market value, because the fall in value is then recorded in the accounts. The answer depends on how the asset is classified, because assets held at cost are not adjusted until sold.
Why do traders talk about taking profits?
Because selling turns a paper profit into a real one, which protects it from later price falls.
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