Legal Definitions - paper profit

A paper profit refers to an increase in the value of an investment or asset that an individual or entity owns, but which has not yet been sold. It represents a potential gain that exists "on paper" because the asset's current market value is higher than its original purchase price. However, this profit is not considered actual cash or a finalized gain until the asset is sold. If the market value of the asset decreases before it is sold, the paper profit can diminish or even turn into a paper loss.

Here are some examples to illustrate this concept:

• Stock Market Investment: Imagine an investor purchases 100 shares of Company X at $50 per share, totaling an investment of $5,000. A few months later, Company X's stock price rises to $75 per share. At this point, the investor's shares are worth $7,500 (100 shares x $75). The investor has a paper profit of $2,500 ($7,500 current value - $5,000 original investment). This profit is "on paper" because the investor has not yet sold the shares; it only becomes a realized cash profit if and when they decide to sell them at or above the current market price.

• Real Estate Appreciation: A family buys a house for $400,000. Five years later, due to a booming local housing market and improvements they've made, a real estate agent estimates their home's market value to be $550,000. The family has a paper profit of $150,000 on their home. This profit is unrealized because they still own the house and haven't sold it. The $150,000 gain would only become a tangible profit if they were to sell the property at that higher valuation.

• Collectible Items: An individual purchases a rare comic book for $500. Over several years, the comic book gains significant popularity and rarity, and an expert appraises its current market value at $2,000. The individual now holds a paper profit of $1,500 on the comic book. This profit is not actual money in their pocket; it's a potential gain that would only be converted into cash if they chose to sell the comic book at its current appraised value.