The game had ended 0-0 in regulation and extra time.
A pair of Paraguay misses in the shootout saw them exit the tournament, with Manchester City striker Gabriel Jesus hitting the decisive spot kick for the Copa America hosts.
Willian, Marquinhos and Philippe Coutinho converted their penalties for Brazil, while Miguel Almiron, Bruno Valdez and Rodrigo Rojas netted for Paraguay.
Brazil now have four straight shutouts at the Copa América.
It is their longest such streak at the tournament, since keeping eight clean sheets from 1989 to 1991.
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