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| Phantom Gain |
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A situation that arises when a gain on an investment is offset by a loss in the same investment, which usually comes from an income tax provision. Phantom gains are named as such because there is no true return, although it may seem otherwise.
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This is a difficult situation to identify because the losses may not be so apparent on the surface. For example, let's look at a bondholder who also receives coupon payments from the same bond.
If the bondholder receives a coupon payments totaling $150 during a one-year period and then sells the bond during the year for a loss of $130, the bondholder may believe that he or she has gained $20 during the year. However, the taxes the investor will pay on the coupon payment will reduce the net payment. Assume that the investor pays $30 in taxes on the coupon payment. This investor has a phantom gain of $20, but in reality he or she has lost $10.
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