Background: Diagnosing parosmia is a challenge. The present study aimed to explore the distinctions between hyposmic patients with and without parosmia utilizing electroencephalography-derived olfactory event-related potentials (ERP). Methods: Forty-four patients with hyposmia were enrolled and divided into a group with parosmia (n = 23, mean age ± standard deviation = 48 ± 14 years, seven men) and a group without parosmia (n = 21, age = 52 ± 12 years, seven men) based on the clinical interview. Additionally, 21 healthy controls (mean age = 45 ± 14 years, six men) were included. Various measurements were obtained, including the Sniffin’ Stick test, threshold tests for the odorants furfural mercaptan and 2,6-nonadienal, a modified Sniffin’ Stick parosmia test, and well-being ratings. Chemosensory ERPs were recorded separately for each nostril using high-precision, computer-controlled air-dilution olfactometry. Results: Patients with parosmia had a decreased olfactory function similar to that observed in patients with hyposmia, although the odor sensitivity of patients with severe parosmia remained relatively unaffected. Patients with parosmia reported a decrease in well-being compared to controls. The severity of parosmia was positively correlated with odor sensitivity. Furthermore, patients with severe parosmia exhibited faster responses to unpleasant odors than patients without parosmia. Conclusion: Overall, the present findings support the idea that parosmia predominantly occurs during olfactory recovery, significantly disturbing patients and warranting the development of effective treatments. Notably, the relatively faster responses of hyposmic patients with severe parosmia suggest that the generation of distorted olfactory responses may involve early stages of the processing of olfactory information.