DEFINITION of ‘Phantom Gain’
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 actual return, although it may initially seem otherwise.
BREAKING DOWN ‘Phantom Gain’
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 payment 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.