It depends. Generally, you inherit the basis of anything given to you as a gift. This means you would take the same basis as the friend who gave you the bitcoins. However, an important exception applies if the friend’s basis was more than the market value of the bitcoins at the time of the gift (i.e. the bitcoins had a built in loss).
In that case, you would wait to determine your basis until you sell or exchange the gifted bitcoins in the future. When the time comes, you would use the following rules:
- First, calculate your gain/loss using your friend’s basis.
- If this results in a gain, then the default rule applies and nothing changes.
- If this results in a loss, however, then you do not inherit your friend’s basis. Instead, you must use the market value of the bitcoins on the date of the gift and recalculate your gains/loss.
- After recalculating, you must check if you still have a loss. If yes, then proceed with using the market value as your basis. However, if the recalculation results in a gain, then the tax law says to ignore the gain and report nothing. To be clear, you have no gain or loss in this situation.
Now that last point might confuse many readers, so here is an example to demonstrate. Assume you received bitcoins worth $750 at the time of the gift. Your friend’s basis was $1000. This triggers the exception discussed above (because his basis is less than the market value) and you have to wait until you sell the bitcoins in the future to determine your basis. Consider three alternative sale prices:
- Sale Price = $1200. Using your friend’s basis of $1000, this creates a gain of $200. Therefore, you inherit your friend’s basis and have a realized gain of $200. No problem.
- Sales Price = $600. Using your friend’s basis of $1000, this creates a loss of $400. Therefore, you cannot inherit your friend’s basis. Instead, you must use the value of the bitcoins on the date of the gift, which was $750, and recalculate your gain/loss. This results in a loss of $150, so you would proceed with using the $750 market value as your basis and recognize a$150 loss. No Problem.
- Sales Price of $900. Using your friend’s basis of $1000, this creates a loss of $100. Therefore, you cannot use your friend’s basis. Instead, you must recalculate your gain/loss using the value of bitcoin on the date of the gift, which was $750. However, this results in a gain of $150 instead of a loss. Therefore, you disregard the sale and have no gain or loss to report.
This is perplexing tax treatment. It might help to think of this rule as preventing your friend from shifting bitcoin losses to your tax return. This is why you get to inherit his basis only if it would create a gain on the subsequent sale. If not, then the amount of his loss is extinguished and you get to recognize only the amount of loss that accrued after the gift occurred, and no additional loss has occurred, then you recognize nothing.
In any case, when receiving bitcoins as a gift, make sure to ask the person what his or her basis was in the bitcoin, as well as their acquisition date (which you always inherit). Lastly, write down the date of the gift and the market price of bitcoins on that day.