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  • I want to wrap it WITH the paper
  • I want to wrap it IN the paper
  • I want to wrap it BY the paper
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    In fact, it is the paper that you wrap, not the 'it'. So if at all the structure is to be used, the preposition could be in: wrap it in paper, in a roundabout way, sort of. That's because wrap can also mean 'have something wrapped in a sheet of paper or other material.' – Kris Feb 19 '14 at 6:58
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Wrap is used as a transitive verb, an intransitive verb and a noun.

As a transitive verb, you wrap something in/by something else or for someone.
For example:

To wrap something IN paper = to use paper to surround something completely (denotes enclosure of one thing by another).
To wrap something BY something = to conduct the wrapping beside something else (denotes a position in space).
To wrap something FOR someone = to conduct the wrapping with a particular intention which relates to another person (denotes an intention).

As an intransitive verb, you wrap up something, meaning to finish or end it.
For example:

We have to wrap up the meeting at 4 o'clock sharp.

The most common uses of 'wrap' + 'with' are where 'wrap' is used as a noun, to denote a rolled-up sandwich, or a shawl, for example.
You'll find plenty of examples here and here.

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