There are several cases in which cost is not your basis in the property for tax purposes. The following are some examples of when a basis other than cost is assigned to the property.
Property Received for Services
If you receive property in payment for your services, you include the property’s fair market value in your income, and this becomes your basis in the property. If the value of the property was agreed on beforehand, you can use this as the property’s fair market value, unless there is evidence to the contrary.
Taxable Exchanges
In a taxable exchange, in which you are subject to tax on a gain and are allowed to take a deduction for a loss, the basis of the property you receive in the exchange is usually its fair market value at the time of the exchange. A taxable exchange occurs when property is exchanged for property that is not similar. This is differentiated from a like-kind exchange, which may not be taxable.
Involuntary Conversions
Involuntary conversions include casualties, thefts, and condemnations of property. If you receive similar property as a result of the involuntary conversion, the basis of the replacement property you receive is the basis of the old property on the date of the conversion plus or minus the following:
Decrease the basis by:
Any loss you recognize on the conversion (tax-deductible loss)
Any money you receive in reimbursement that you do not spend on replacement property
Increase the basis by:
Any gain you recognize on the conversion (taxable gain)
Any cost related to acquiring the replacement property
If as a result of the conversion, you receive money or other property that is not similar to the old property, and you buy replacement property, the basis of the replacement property is its cost reduced by any gain that you did not recognize on the conversion (gain that was not taxable).