DEFINITION of 'Paper Profit (Paper Loss)'
Unrealized capital gain (or capital loss) in an investment. It is calculated by comparing the market price of a security to the original purchase price. Gains or losses only become realized when the security is sold.
BREAKING DOWN 'Paper Profit (Paper Loss)'
Investors commonly justify bad investment decisions because of paper gains or losses. Two examples:
1. Although you officially recognize a transaction when you sell a security, many investors believe they haven't lost any money in a sinking investment because they haven't yet sold it. While you don't have a capital loss for tax purposes, there is a loss in value.
2. On the flip side, the dotcom boom saw many "paper millionaires;" created due to stock options. The problem was that rules in options contracts made it impossible for these people to sell their stock and realize their wealth. Consequently, after the dotcom market crashed, many paper millionaires went broke.