question about taxed and bitcoin

I am a bit confused about how taxing is tracked with bitcoin. Hypothetically speaking, let's say someone received bitcoin in 2016 and left it in a cold storage wallet ever since. It was NEVER on any exchange. When the said person chooses to cash some out, is that when taxes are triggered? How would the IRS know what the person paid for it, if it was never bought from any exchange. It could have even just been a gift sent to the person in 2016. I hope that makes sense, kinda hard to explain the situation.