How Digital Assets Are Taxed, In Outline
Treated as property, which means ordinary transactions create taxable events people do not expect.
United States federal tax treatment of virtual currency generally follows property rules rather than currency rules. That single classification produces most of the surprises.
Disposals are taxable
Because it is property, disposing of it is a taxable event. Selling for dollars is obviously one. So, generally, is exchanging one digital asset for another, and so is using it to pay for goods or services.
The last two catch people repeatedly. A holder who never converted to dollars can still have a substantial reportable position from trading between assets.
Basis and holding period
Gain is the difference between proceeds and basis — generally what you paid, including fees. Whether the gain is short-term or long-term depends on how long the asset was held, and the distinction affects the rate.
Tracking basis across multiple platforms and years is the practical difficulty. Records that were never kept cannot be reconstructed reliably, and the burden of substantiating basis falls on the taxpayer.
Income rather than gain
Assets received as payment for work, and certain rewards from participating in a network, are generally treated as income at the value when received, with that value becoming the basis for a later disposal.
Losses
Capital losses can offset capital gains, with limited offset against ordinary income and carryforward of the remainder. The treatment of assets lost through platform failure or theft is more complicated and depends on specific facts.
Reporting
Federal returns ask directly about digital asset transactions, and reporting obligations for brokers in this area have been expanded — meaning information reported to the authorities is increasing.
New York
New York generally conforms to the federal treatment of income for state purposes, so the federal characterisation flows through to state and, for city residents, city tax.
The practical advice
Keep contemporaneous records of every transaction with dates, amounts and values, export them from platforms while you still have access, and involve an accountant familiar with this area. The rules have changed repeatedly; confirm the current position before relying on any summary.
This is general information, not tax advice. Rates and thresholds change; confirm current figures with the agencies linked below or with your accountant.