What is the Basis of Gift Property?

If your grandparents gave you some stock which you then sold, how would you determine if you had a gain or loss on the stock for tax purposes? In most cases the grandparents have had the stock for a long time so the current value is higher than their original cost so the basis for determining gain would be your grandparents' original cost of the stock. You would have to pay tax on the capital gain. However, to prevent taxpayers from moving capital losses to other taxpayers the IRS has a rule that if the fair market value of the gift property at the time of the gift is lower than the donor's basis and you sold at a loss, then your basis in the gifted property is the fair market value. This reduces any capital losses you can take. Your holding period starts on the day after the date of the gift if your basis is determined by the fair market value and you sold at a loss.  For example, you received 1 share of stock from your uncle that he bought for $10 a share which had an $8 value on the date you received it. If you sold the stock for $7, then your capital loss would be only $1 since your basis is the fair market value. If you sold the stock for $11, then you would have a capital gain of $1 a share since your basis is the uncle's basis of $10 a share.