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Crypto Tax Glossary: Terms for Beginners

Zac McClure
ByZac McClure, MBAReviewed byTynisa (Ty) Gaines, EAUpdated on September 18, 2023 · minute read
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Many crypto investors don't know much about reporting and filing taxes. On the other hand, many accountants don't know much about trading crypto. This means that sometimes important information gets lost in translation.

To prevent confusion, and to introduce beginners to the world of crypto tax, we're constantly updating our crypto tax terms glossary. This list covers many common terms that may be unfamiliar to novices in crypto tax.

Have a term you think we should add? Let us know! Want to learn more about filing taxes on digital assets? Check out our crypto tax guide.

501(c)(3): An organization recognized by the IRS as being a non-profit or charitable organization. Donations to 501(c)(3) organizations may be tax deductible. 

Airdrop: The mass distribution of tokens to many wallets, often as a reward or incentive. Airdrops may require a recipient’s consent or may be directly deposited into their wallet. They have increasingly been used in phishing schemes. 

Alt coin: A token that is not Bitcoin

Audit trail: A detailed record that sequentially tracks how an asset has been transferred or traded 

Average cost basis: The accounting method used in the UK, Canada, and some other nations

Carryforward: Using tax losses from prior years to offset capital gains from the current tax year

Capital gain: Earnings made from the appreciation and subsequent sale or trade of an asset

Centralized exchange (CEX): An organization that brokers sales and trades of tokens and is owned and governed by a known entity or entities. These must typically follow know-your-customer (KYC) rules and report to tax authorities. Examples: Coinbase, Gemini, Binance

Cost basis: The amount a trader paid for an asset, plus additions for any applicable fees  

Decentralized autonomous organization (DAO): An organization (social or commercial) governed by rules encoded in smart contracts stored on the blockchain rather than by any centralized leadership. Examples: Uniswap, MakerDAO, FWB, Radicle

Decentralized finance (DeFi): A broad umbrella term for financial instruments (exchanges, brokerages, etc) made directly accessible to investors via smart contracts on a blockchain. DeFi aims to increase access to investment opportunities by bypassing traditional third-party intermediaries. 

Disposal: Accounting term for relinquishing control over an asset through a sale, swap, trade, or some other mechanism  

Estimated taxes: A payment of a portion of your expected total tax liability, these are due four times a year from people who expect to make significant amount of income through self-employment

Report of Foreign Bank and Financial Accounts (FBAR): If you, at any point in the year, had more than $10,000 in one or more foreign accounts, you need to submit this form to the Treasury’s Financial Crimes Enforcement Network (FinCEN). It is not clear whether foreign crypto exchange accounts must be reported; we recommend speaking to your tax advisor. 

Fiat: Government-issued currency not backed by any commodity. Examples: USD, CAD, EUR, JPY 

First-in-first-out (FIFO): A form of specific ID accounting in which the first tax lots acquired are the first sold 

Gas fee: A transaction fee paid to the Ethereum network’s miners. Gas fees can sometimes be added to an asset’s cost basis.  

Hard fork: Occurs when a community decides to make fundamental change in a blockchain that results in its new blocks no longer being backward-compatible with its old blocks. This creates a new branch of the chain, and a corresponding new token. 

Highest-in-first-out (HIFO): A form of specific ID accounting in which the highest cost tax lots acquired are the first sold 

Holding period: The amount of time an investor keeps an asset after acquiring it and before trading or selling it

Form 1040: The IRS form used to report individual income tax, an individual tax “return”

Form 1099: An IRS form used to report income or earnings made from something other than wages, salaries, or tips. Payers (exchanges, brokerages, etc) send a copy of a Form 1099 to both the IRS and the payee (individual trader). There are more than 20 types of Form 1099, but the most common in cryptocurrency include 1099-MISC, 1099-K, and 1099-B. 

Form 8949: The IRS form that aggregates capital gains and losses as reported on Forms 1099-B or 1099-S. The v total is then carried over to the Schedule D and then the Form 1040.

Last-in-first-out (LIFO): A form of specific ID accounting in which the last tax lots acquired are the first sold 

Long-term gain: A long-term gain (or loss) is one realized when the sold capital asset’s holding period was one year or more. Long-term gains receive preferable tax treatment for individual taxpayers.

Mining: The process by which new transactions are verified and added to a proof-of-work blockchain such as Bitcoin. Crypto miners are rewarded for their computational power with newly minted tokens. Mined tokens are taxed as ordinary income. 

Minting: Creating a new token on a blockchain

Non-fungible token (NFT): A file minted to a blockchain whose unique metadata makes it one-of-a-kind and unable to be subdivided or copied 

Ordinary income: Income earned through salaries, wages, or payment for a good or service 

Play-to-earn (P2E) games: NFT-based games through which players can earn, buy, and sell crypto assets that often have “real world” value. Examples: Axie Infinity, Cryptokitties, Gods Unchained

Proceeds: The total amount received from the sale or trade of an asset 

Profit and loss (PnL): The change in value of a trader’s positions. In crypto margin trading, PnLs can be realized or unrealized; open positions have unrealized PnL and closed positions have realized PnLs

Realizing a gain or loss: Locking in a gain or loss on an asset by selling, swapping, or trading it 

Rug pull: A type of crypto scam in which investors are left with worthless tokens after the project’s creators limit users’ access to tokens and/or quickly sell off their holdings in the project. Examples: Thodex, Meerkat Finance, $SQUID

Safe harbor rule: If you pay quarterly estimated taxes and make payments that fall within a certain range, you have made “safe harbor” and will not be penalized for underpayment should your actual total tax liability exceed your estimated payments. The safe harbor threshold varies based on whether you make more or less than $150,000.

Security: A tradable financial instrument, as recognized by the US Securities and Exchange Commission. Currently, crypto assets are not officially considered securities.  

Schedule C: An IRS form that is part of the Form 1040 and is used to report business earnings from a sole proprietorship 

Schedule D: An IRS form that is attached to Form 1040 and is used to report capital gains and losses. 

Sh-tcoin: An alt coin that has lost most or all value; often one that capitalized on a meme for short-term gains

Smart contract: A computer program on the blockchain that executes specific actions when certain conditions are met, as laid out in a previously agreed upon digital contract 

Specific ID: A method of inventory valuation that tracks individual inventory items rather than group them together, which can reduce capital gains taxes in a given year

Short-term gain: A short-term gain (or loss) is one realized when the sold capital asset’s holding period was a year or less. Short-term gains receive the ordinary income tax rate. 

Stablecoin: A token designed to pegged to the value of another currency, token, or commodity, for instance the U.S. dollar. Examples: DAI, USDT

Staking: Depositing tokens into a proof-of-stake protocol in order to support its continued operation and receive staking rewards 

Taxable event: Transaction that results in taxes owed to the government

Tax loss harvesting: Strategically identifying unrealized losses that can be realized through sales or trades to offset capital gains  

Tax lot: A set of tokens purchased or acquired in a specific transaction 

Wash sale: Selling an asset at a loss and reacquiring the same asset within 30 days. This can allow traders to artificially increase their capital losses

Wrapped token: A token pegged to the value of another token in order to allow a trader to use the original asset on a different blockchain. A wrapped token is signified with a W, ie- WBTC, WETH 

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Zac McClure
Zac McClureCo-Founder & CEO at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.
Tynisa (Ty) Gaines
Reviewed byTynisa (Ty) GainesTax Expert at TokenTax
Tynisa (Ty) Gaines, EA has more than 20 years of experience as a tax professional. Ty has published numerous tax articles, two tax e-books, and an academic publication on cryptocurrency for the National Income Tax Workbook.

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