How do I determine my basis in virtual currency that I received as a bona fide gift

To determine your basis in virtual currency received as a bona fide gift, you need to consider whether you will have a gain or a loss when you sell or dispose of it:

1. For Gain Determination: Your basis is equal to the donor’s basis plus any gift tax the donor paid on the gift.
2. For Loss Determination: Your basis is the lesser of the donor’s basis or the fair market value (FMV) of the virtual currency at the time you received the gift.

If you do not have any documentation to substantiate the donor’s basis, then your basis is zero. This approach ensures that the basis reflects the value of the virtual currency appropriately for tax purposes, whether it results in a gain or a loss upon disposition. For more detailed information, you can refer to IRS Publication 551, Basis of Assets.

Sources:
Notice 2014-21
Rev. Rul. 2019-24
Publication 551 (12/2022)