Suppose your favorite crazy uncle gives you a painting that ends up being really expensive but gives you a headache when you look at it. After he dies, if you want to sell the painting, your accountant will tell you that you will owe capital gains tax on the sale and asks for your basis so that you can reduce the amount on which you’ll pay.
Your basis, or the amount you’ll deduct from the sale price to figure out how much you need to pay taxes on, is generally what the crazy uncle paid for the painting. If you end up selling it at a loss though, your basis is either the lower of your crazy uncle’s cost or the fair market value on the date you received the gift. These numbers might be adjusted in some cases, but without records, you have no way to prove how much your crazy uncle paid for it, and thus saving yourself some tax money.
You really should ask for the records (i.e. the receipt) when you get an expensive gift like this, even if you feel a little awkward when you do it. Since this is your crazy uncle, chances are he won’t be offended at all. He may even understand that no matter how much you appreciate his gift, it’s important to have records along with expensive gifts. This may even apply to uncles that aren’t crazy!
If you’re the crazy gift-giving relative, you should definitely include cost records with expensive gifts of paintings, artwork, and other weird things so that the recipient doesn’t end up with a giant tax bill someday in the future. After all, I’m sure they’ll love that expensive eight-foot tall goddess symbol . . . but what if their kids don’t? Think of the future.