Legal Definitions - paper loss

A paper loss refers to a decrease in the value of an asset or investment that has not yet been sold or otherwise disposed of. It is an unrealized loss, meaning it exists only "on paper" in financial records because the asset's current market value is lower than its original purchase price. This loss only becomes concrete and "realized" if and when the asset is actually sold at that lower value. If the asset's value recovers before it is sold, the paper loss may diminish or disappear entirely.

Here are some examples illustrating a paper loss:

• Stock Market Investment: Imagine an individual purchases 100 shares of Company X stock at $50 per share, for a total investment of $5,000. A few months later, due to market fluctuations, the stock price drops to $40 per share. At this point, the investment is only worth $4,000 ($40 x 100 shares). The individual has a $1,000 paper loss ($5,000 original value - $4,000 current value). This loss is "on paper" because they still own the shares; they haven't sold them yet. If the stock price goes back up to $50 or higher, the paper loss would vanish or turn into a paper gain.

• Real Estate Property: A couple buys a house for $400,000. Two years later, a downturn in the local housing market causes similar homes in their neighborhood to be appraised at $370,000. While they still own the house and live in it, their property has experienced a $30,000 paper loss. This loss is not final because they haven't sold the house. If they were to sell it at the current market value, the $30,000 would become a realized loss. However, if the market recovers and their home's value increases again, the paper loss would decrease or disappear.

• Business Inventory: A manufacturing company purchases a large quantity of specialized raw materials for $200,000. Before these materials can be used in production, a new, cheaper alternative becomes widely available, causing the market value of the original raw materials to drop to $180,000. The company now holds inventory that is worth $20,000 less than what they paid for it. This $20,000 represents a paper loss on their balance sheet. The loss is unrealized because the materials are still in their warehouse; they haven't been sold or used at the lower value. The company might still use them in production, or their value could potentially recover if the market shifts again.