Demystifying Crypto and Taxes
A Comprehensive Glossary
Demystifying Crypto and Taxes
A Comprehensive Glossary
Airdrop
Distribution of free cryptocurrency tokens to wallet addresses, often as part of a marketing campaign or network upgrade.
Bagholder
A bagholder is an investor who is left holding a depreciating asset, such as a cryptocurrency, which has significantly decreased in value.
Bear Market
A bear market is the opposite of a bull market. It describes a market in which prices are falling or expected to fall, leading to pessimism and widespread selling.
Bitcoin
The first and widely recognized cryptocurrency, Bitcoin emerged in 2009, introduced by a person or a collective entity using the pseudonym Satoshi Nakamoto.
Block Explorer
A block explorer is an online tool or application that allows users to explore and track activities on a blockchain.
Blockchain
A blockchain refers to a decentralized and distributed digital ledger. It records transactions across numerous computers,
Bounty Program
A bounty program is an incentive-based initiative offered by cryptocurrency projects or platforms to reward users, developers, or security experts for finding and reporting bugs, vulnerabilities, or other issues within their systems.
Bull Market
A bull market refers to a market characterized by rising prices and investor optimism.
Capital Loss
A financial loss incurred when the sale price of a cryptocurrency is lower than its acquisition cost.
Cold Wallet (Cold Storage)
A wallet that is not connected to the internet, making it less vulnerable to hacking.
Cost Basis
The original value of a cryptocurrency when acquired. It's used to calculate capital gains or losses.
Cross-Chain (DeFi Terminology)
The ability of assets or data to move between different blockchain networks, allowing interoperability between different blockchains.
Crypto Payment Gateway
A service that enables businesses to accept cryptocurrency payments for goods and services.
Crypto Tax Reporting Software
Specialized software, like CRPTM, that helps cryptocurrency users track transactions and calculate tax obligations accurately
Crypto-to-Crypto Transaction
A transaction in which one cryptocurrency is exchanged or traded for another,
Cryptocurrency Exchange
Cryptocurrency exchanges are online platforms where users can buy, sell, and trade various cryptocurrencies.
Cryptocurrency Exchange Rate
The value of one cryptocurrency in terms of another or in terms of a fiat currency.
Decentralized Autonomous Organization (DAO)
An organization governed by code and rules on a blockchain,
Decentralized Exchange (DEX)
A cryptocurrency exchange that operates without a centralized authority, allowing users to trade directly with each other. e.g. Uniswap, IDeX
DeFi Token
A cryptocurrency token specifically designed for use within decentralized finance protocols and applications.
Derivative
A financial instrument whose value is derived from the performance of an underlying asset, index, or reference rate, without ownership of the underlying asset itself.
Dusting Attack
A cyberattack in which a tiny amount of cryptocurrency is sent to a user's wallet to track their transactions.
Elliptic Curve Cryptography (ECC)
ECC, or Elliptic Curve Cryptography, is a type of public key cryptography based on mathematical principles related to elliptic curves.
Encryption
Encryption is the process of converting information into a code to prevent unauthorized access.
ERC-20
ERC-20 is a technical specification employed for smart contracts on the Ethereum blockchain.
Ethereum (ETH)
Ethereum is a decentralized blockchain platform that is open-source and includes smart contract capabilities.
Ethereum Classic (ETC)
Ethereum Classic is a fork of the Ethereum blockchain that preserved the original blockchain after a contentious hard fork.
Fiat Currency
Traditional government-issued currency, such as the US Dollar (USD), Euro (EUR), or Japanese Yen (JPY).
FIFO (First-In-First-Out)
The most commonly used method for determining cost basis is First-in, first-out (FIFO).
FOMO (Fear of Missing Out)
A psychological phenomenon where individuals rush to invest in or buy cryptocurrencies due to the fear of missing out on potential gains.
Fork Dividend
When a cryptocurrency fork results in the creation of a new cryptocurrency, holders of the original cryptocurrency may receive a certain amount of the new cryptocurrency as a dividend.
Futures Contract
A financial contract that obligates the buyer to purchase and the seller to sell a specific asset
Futures trading
It involves agreeing to buy or sell a cryptocurrency at a future date and a predetermined price.
Gas Fee
The fee paid for processing and validating transactions on a blockchain network, such as Ethereum.
Gas Limit
The gas limit denotes the highest quantity of gas permissible for a single transaction on the Ethereum network. It acts as a safeguard against infinite loops or
Gas Price
Gas price is the amount of cryptocurrency a user is willing to pay per unit of gas to execute a transaction or perform operations on the blockchain.
Genesis Block
The genesis block is the first block in a blockchain.
Governance
Governance in the crypto world refers to the processes and mechanisms by which decisions are made within a blockchain network.
GPU Mining
GPU mining refers to the process of using graphics processing units (GPUs) to mine cryptocurrencies.
Gwei
Gwei is a denomination of the cryptocurrency Ether (ETH) on the Ethereum network.
Hard Fork
A type of blockchain fork that results in a permanent divergence from the original chain, creating a new cryptocurrency.
Hedging
A risk management strategy where investors use futures or derivatives contracts to offset potential losses in other investments.
HIFO
The HIFO (highest-in, first-out) method selects the highest remaining cost basis to match with
Hodl
A misspelling of 'hold' that has become a slang term in the crypto community.
Hot Wallet (Hot Storage)
A wallet connected to the internet, typically used for day-to-day transactions.
ICO (Initial Coin Offering)
A fundraising method in which new cryptocurrency tokens or coins are sold to investors before being listed on exchanges.
Impermanent Loss (DeFi Terminology)
A short-term decline encountered by liquidity providers in automated market maker
Just-In-Time (JIT) Compilation
Just-In-Time compilation is a technique used in blockchain platforms to improve the efficiency of smart contract execution.
KYC (Know Your Customer)
A process in which cryptocurrency exchanges and service providers verify the identity of their users
Leverage (Futures and Derivatives)
The practice of borrowing funds to amplify trading positions, which can result in both higher profits and higher losses.
Leverage Tokens
Specialized cryptocurrency tokens designed to provide leveraged exposure to the price movements of an underlying asset
Leveraged Tokens Rebalancing Mechanism
A specific process used in leveraged tokens to maintain the intended leverage ratio and risk exposure in line with the underlying asset's price movements.
LIFO
LIFO, short for Last-in, first-out, is an alternative method for calculating cost basis that may have advantages depending on market conditions
Liquidity Pool
A pool of funds provided by users in a decentralized exchange or DeFi protocol, used for facilitating cryptocurrency trading.
Liquidity Provider (DeFi Terminology)
Individuals or entities that contribute assets to decentralized liquidity pools in DeFi protocols in exchange for rewards.
Long Position
A trading position where an investor expects the price of an asset to rise, allowing them to profit from price increases.
Margin (Futures and Derivatives)
The amount of collateral or funds that traders must deposit to cover potential losses when trading futures and derivatives.
Margin Trading
A trading strategy in which traders borrow funds to trade larger positions, potentially amplifying both gains and losses.
Mark-to-Market (MTM)
The daily revaluation of a futures or derivatives contract to reflect its current market value, used for margin calculations.
Metaverse
A virtual shared space, often built on blockchain technology, where users can interact, own digital assets, and participate in various activities.
Mining
The process of validating and verifying cryptocurrency transactions, usually through computational work, in return for rewards.
NFT
Non-fungible tokens (NFTs) are digital assets that are unique and indivisible, meaning they cannot be exchanged for something else in a one-to-one ratio.
NFT Farming (Liquidity Farming)
A decentralized finance (DeFi) practice where users provide liquidity to NFT-based platforms, often in exchange for rewards in the form of tokens or NFTs.
NFT Marketplace
An online platform where users can buy, sell, and trade NFTs, often used for digital art, collectibles, and virtual assets.
NFT Minting
The process of creating a new Non-Fungible Token (NFT) representing a unique digital asset, artwork, collectible, or other digital item on a blockchain.
NFT Royalty
A mechanism built into certain NFT smart contracts that allows creators to earn a percentage of each subsequent sale of their NFT, ensuring ongoing compensation for their work.
Options Contract
A financial contract that gives the holder the right (but not the obligation) to buy (call option) or sell (put option) an underlying asset at a specified price within a predetermined timeframe.
Privacy coin/Token
A type of cryptocurrency designed to enhance user privacy by obfuscating transaction details, often used for private transactions.
Proof of Stake (PoS)
A consensus mechanism employed by select cryptocurrencies, in which validators are selected to generate new
Proof of Work (PoW)
A consensus mechanism employed by certain cryptocurrencies, wherein miners engage in a competitive process of
Quorum Chain
Quorum Chain is a private, permissioned blockchain network developed by JPMorgan Chase.
Regulatory Compliance
Adhering to legal and regulatory requirements related to cryptocurrency transactions and taxation, which can vary by jurisdiction.
Rug Pull (DeFi Terminology)
A fraudulent act in DeFi where the creators of a project drain liquidity or funds from a protocol, leaving investors with significant losses.
Sale Proceeds
Crypto sale proceeds refer to the amount of money received by selling cryptocurrency.
Short Position
A trading position where an investor expects the price of an asset to fall, allowing them to profit from price decreases.
Slippage
The difference between the expected price of a cryptocurrency trade and the price at which the trade is executed, often due to market volatility.
Smart Contract (DeFi Terminology)
Self-executing contracts with the terms of the agreement directly written into code on a blockchain, often used in DeFi for automated financial services.
Soft Cap and Hard Cap (ICO Terminology)
The minimum and maximum funding goals set by a cryptocurrency project during an initial coin offering (ICO) or token sale.
Soft Fork
A blockchain upgrade that is backward-compatible, meaning it doesn't create a new cryptocurrency.
Spot trading
In crypto, spot trading refers to the buying or selling a cryptocurrency at its current market price for immediate delivery.
Stablecoin
A cryptocurrency designed to maintain a stable value by pegging it to a reserve asset, such as a fiat currency or a commodity.
Staking
A process in which users participate in the validation and security of a blockchain network by locking up their cryptocurrency holdings as collateral.
STO (Security Token Offering)
A fundraising method similar to an ICO but with tokens classified as securities, subject to regulatory compliance.
Tax Avoidance
The legal act of arranging one's financial affairs to minimize tax liability within the bounds of the tax law.
Tax Credit
A reduction in tax liability offered by governments for specific activities, investments, or circumstances, such as energy-efficient investments or education expenses.
Tax Evasion
The illegal act of intentionally underreporting income or not reporting it at all to reduce tax liability.
Tax ID Number (e.g., SSN, TIN, or SIN)
A unique identifier issued by a government for tax purposes, often required for cryptocurrency tax reporting.
Tax Liability
The amount of taxes owed to the government based on your cryptocurrency transactions and gains.
Tax Loss Carryforward
A tax strategy where capital losses in one tax year can be used to offset capital gains in future years.
Tax Loss Harvesting
A strategy of selling cryptocurrency at a loss to offset capital gains and reduce tax liability.
Tax Lot
A specific group of cryptocurrency units with the same acquisition date and cost basis, often used for calculating capital gains and losses.
Tax Reporting Deadline
The date by which taxpayers are required to submit their tax returns and payments to tax authorities, which varies by jurisdiction and tax type.
Tax Treaty
An agreement between two or more countries that outlines tax treatment for individuals or businesses with activities in multiple jurisdictions.
Tax Withholding
The practice of deducting taxes from payments before they are received by the recipient, often seen in income earned as an employee.
Taxable Event
An action, such as selling, trading, or spending cryptocurrency, that triggers a tax obligation.
Taxable Income
The portion of your income that is subject to taxation after accounting for deductions, exemptions, and credits.
Token
A digital asset built on top of an existing blockchain. Tokens can represent various assets, including utility, security, or even collectibles.
Token Burn
The deliberate and permanent removal of a specific number of cryptocurrency tokens from circulation, often to reduce supply and potentially increase token value.
Token Swap
The process of exchanging one type of cryptocurrency or token for another, often as part of a project's migration to a new blockchain.
Tokenomics
The study of the economic and monetary properties of cryptocurrencies and tokens.
Uncle Block
In blockchain networks like Ethereum, an uncle block (or simply uncle) is a valid block that is not included in the main chain.
Unconfirmed Transaction
An unconfirmed transaction refers to a cryptocurrency transaction that has been broadcast to the network but has not yet been included in a block and confirmed by miners.
Underlying Asset
In the context of cryptocurrency derivatives and tokens, the underlying asset refers to the cryptocurrency (such as Bitcoin or Ethereum) that a derivative contract or token is based on.
Unspent Transaction Output (UTXO)
UTXO refers to the output of a cryptocurrency transaction that has not been spent yet.
Utility Token
A utility token is a type of digital asset providing access to a specific product or service within a blockchain ecosystem.
Validator
A validator is a participant in a proof-of-stake (PoS) or delegated proof-of-stake (DPoS) blockchain network responsible for validating transactions and creating new blocks.
Vitalik Buterin
Vitalik Buterin is the co-founder of Ethereum, one of the most prominent and influential cryptocurrencies and blockchain platforms.
Volume
Volume in the cryptocurrency market refers to the total number of tokens or contracts traded within a specific timeframe.
Wallet
Crypto wallets are software programs that store the public and private keys for storing, sending, and receiving cryptocurrencies.
Wallet Address
A unique alphanumeric code used to send and receive cryptocurrencies. It functions like a bank account number.
Wallet Backup Phrase (Seed Phrase)
A series of words used to recover a cryptocurrency wallet in case of loss or device failure.
Wash Sale (Crypto Version)
A practice where a trader sells a cryptocurrency at a loss and then repurchases it shortly after, potentially disallowing the loss for tax purposes.
Whale Wallet
A cryptocurrency wallet associated with a 'whale,' typically containing a substantial amount of cryptocurrency.
Whales
Individuals or entities with a significant amount of cryptocurrency holdings, often capable of influencing cryptocurrency markets.
Whitelist and Blacklist (DeFi Terminology)
Lists of addresses or entities that are either approved (whitelisted) or prohibited (blacklisted) from participating in certain DeFi protocols.
Wrapped Token (DeFi Terminology)
Tokens representing other assets (e.g., Bitcoin) on a different blockchain to make them compatible with DeFi platforms.
XRP
XRP is a digital currency and native cryptocurrency of the Ripple network. It's designed for fast and low-cost cross-border payments and remittances.
Yield
The return or interest earned on an investment, often measured as an annual percentage yield (APY), commonly used in DeFi.
Yield Compression
A phenomenon in DeFi where the yields on decentralized lending and borrowing platforms decrease due to increased competition or changes in market conditions.
Yield Farming
A decentralized finance (DeFi) strategy in which users contribute liquidity to decentralized exchanges and protocols, earning rewards typically in the form of additional tokens as compensation.
Yield Optimizer (DeFi Terminology)
DeFi protocols or platforms that automatically allocate user funds to different strategies or pools to maximize yield.
Zero-Knowledge Proof
Zero-Knowledge Proof (ZKP) is a cryptographic technique that allows one party (the prover) to prove to another party (the verifier) that a statement is
Zombie Coin
ZZombie Coin is a term used to describe a cryptocurrency that is no longer actively developed, maintained, or traded but still exists on various exchanges.
Conclusion
Understanding these cryptocurrency and crypto tax terms is the first step toward becoming a responsible and informed crypto participant. As the cryptocurrency landscape continues to evolve, staying informed about tax regulations in your jurisdiction is essential. Remember that tax laws can vary significantly from one country to another, so seeking professional advice when necessary is highly recommended. By navigating the world of crypto taxes knowledgeably, you can make informed decisions and ensure compliance with tax authorities.
Disclaimer: The glossary provided here is for informational purposes only and is not intended as professional financial, legal, or tax advice. The definitions and explanations offered are general in nature and may not cover all nuances or variations of the terms discussed.
The use of financial instruments, investments, cryptocurrencies, and tax-related matters involves inherent risks, and regulations can vary significantly by jurisdiction. Readers are strongly encouraged to seek advice from qualified professionals and conduct thorough research before making financial, investment, or tax-related decisions.
The information provided in this glossary is based on knowledge available as of the date mentioned, and developments in the financial, cryptocurrency, and tax sectors may have occurred since that time. Users are urged to verify information and consult with relevant authorities or experts for the most up-to-date and accurate guidance.
By using this glossary, you acknowledge and agree that the information presented is not a substitute for professional advice, and you assume full responsibility for your financial and tax-related decisions. The creators and providers of this glossary disclaim any liability for actions taken or not taken based on the information contained herein.