Resources
Tax and crypto glossary
Plain-English definitions of the terms that show up in IRS letters, crypto tax reports, offshore disclosures, and opinion letters, written by the attorneys and accountants who deal with them every day. Each term links to the guide or service page where we go deeper.
Browse by topic: All terms Business and Corporate (18) Crypto Tax (71) International Tax (24) IRS Forms (47) IRS Notices and Letters (10) Opinion Letters (4) Tax Controversy (68) Web3 Regulation (7)
Showing 71 terms in Crypto Tax.
A
- Airdrop
- An airdrop is a distribution of tokens to wallet holders, and the IRS treats tokens you receive and control as ordinary income at their fair market value on the date of receipt.
B
- Blockchain analytics
- Blockchain analytics is software, from vendors such as Chainalysis, that clusters wallet addresses, follows funds across chains, and links on-chain activity to real identities, and the IRS uses it to select and build crypto cases.
- Bridging
- Bridging is moving an asset from one blockchain to another through a protocol that locks the original and issues an equivalent on the destination chain, and its tax treatment follows the same unsettled analysis as wrapping.
C
- Capital gains (crypto)
- A capital gain is the profit from selling, trading, or spending a digital asset for more than your cost basis; short-term gains (held one year or less) are taxed as ordinary income and long-term gains at lower rates.
- Centralized versus decentralized exchange (CEX versus DEX)
- A centralized exchange (Coinbase, Kraken, Binance) holds customer assets and reports to the IRS; a decentralized exchange (Uniswap, Curve) is a set of smart contracts with no custodian and no reporting.
- Collectibles tax rate
- The collectibles tax rate is a 28 percent maximum federal rate on long-term gains from collectibles such as art, antiques, and coins, and the IRS has said it will apply a look-through test to decide whether an NFT is a collectible.
- Cost basis (crypto)
- Cost basis is what you paid to acquire a digital asset, including fees, and is the starting point for calculating gain or loss when you sell, trade, or spend it.
- Crypto audit
- A crypto audit is an IRS examination focused on digital asset transactions, typically triggered by mismatches between broker reports and the return, John Doe summons data, or a "no" answer to the digital asset question when the IRS holds contrary records.
- Crypto donations
- Donating appreciated cryptocurrency to a qualified charity generally avoids capital gains tax and allows a deduction for fair market value, but donations over 5,000 dollars require a qualified appraisal and Form 8283.
- Crypto gifts
- Giving cryptocurrency to another person is not a taxable sale; gifts above the annual exclusion require a gift tax return, and the recipient generally takes the giver's cost basis and holding period.
- Crypto reconciliation
- Crypto reconciliation is the process of matching every on-chain and exchange transaction to a complete, consistent set of records with dates, amounts, and cost basis, so the resulting gains, losses, and income are correct and defensible.
- Crypto tax software errors
- Crypto tax software errors are the systematic mistakes tax calculators make with wallet transfers, missing cost basis, DeFi transactions, and NFTs, which routinely produce reports that overstate or understate gains.
- Crypto theft loss
- A crypto theft loss is the deduction available under Section 165 when digital assets are taken by fraud, hacking, or a scam, allowed for losses on transactions entered into for profit but generally not for personal losses.
- Custodial versus non-custodial wallet
- In a custodial wallet a third party (usually an exchange) holds the private keys; in a non-custodial wallet you hold them. Custodians report to the IRS; you do not.
D
- Decentralized autonomous organization (DAO)
- A decentralized autonomous organization is a blockchain-based entity governed by token holders through smart contracts, and for U.S. tax purposes an unincorporated DAO is often treated as a partnership, making members responsible for its income.
- Decentralized finance (DeFi)
- Decentralized finance is a set of blockchain applications, such as lending protocols, decentralized exchanges, and liquidity pools, that let users transact without an intermediary, and every swap, deposit, or reward in them can be a taxable event.
- Digital asset (IRS definition)
- A digital asset is any digital representation of value recorded on a cryptographically secured distributed ledger, the IRS term that covers cryptocurrency, stablecoins, and NFTs for tax purposes.
- Digital asset broker regulations
- The digital asset broker regulations are the Treasury rules, finalized in 2024, that require exchanges and certain other brokers to report customer sales of digital assets to the IRS on Form 1099-DA, beginning with 2025 transactions.
- Digital asset question (Form 1040)
- The digital asset question is the yes-or-no question near the top of Form 1040 asking whether you received, sold, exchanged, or otherwise disposed of a digital asset during the year.
- Dominion and control
- Dominion and control is the standard the IRS uses to decide when you have received crypto as income: the moment you can transfer, sell, exchange, or otherwise dispose of it.
F
- Fair market value (crypto)
- Fair market value is the price a digital asset would sell for on the open market at a given time, used to measure income when crypto is received and proceeds when it is spent or traded.
- FIFO (first in, first out)
- FIFO is the default cost basis method for digital assets, treating the earliest units you acquired in a wallet as the first ones sold.
- Form 1099-DA
- Form 1099-DA is the IRS information return that brokers and exchanges use to report a customer's digital asset sales and exchanges, starting with transactions in tax year 2025.
- Form 8949
- Form 8949 is the IRS form used to list each sale or exchange of a capital asset, including cryptocurrency, with the date acquired, date sold, proceeds, cost basis, and gain or loss.
G
- Gas fees
- Gas fees are the transaction fees paid to a blockchain network, and for tax purposes they are added to the cost basis of an asset acquired or subtracted from the proceeds of an asset sold.
H
- Hard fork
- A hard fork is a change to a blockchain's protocol that splits it into two chains, and receiving new tokens from the fork is taxable income if you gain control of them.
- HIFO (highest in, first out)
- HIFO is a cost basis method that treats the most expensive units you hold as the ones sold first, which minimizes gain in the current year, and it is only allowed if you specifically identify the units with records at the time of sale.
- Holding period
- The holding period is the time between acquiring a digital asset and disposing of it; one year or less makes the gain or loss short-term, taxed at ordinary rates, and more than one year makes it long-term.
- Hot wallet versus cold wallet
- A hot wallet is connected to the internet (exchange accounts, browser and mobile wallets); a cold wallet is offline (hardware or paper). The distinction affects security and reporting, not how transactions are taxed.
- Howey test
- The Howey test is the Supreme Court standard for whether an arrangement is an investment contract, and therefore a security: an investment of money in a common enterprise with an expectation of profit from the efforts of others.
I
- Initial coin offering (ICO)
- An ICO is a token sale used to raise funds for a project. Buying into one is a purchase of property; the SEC has treated many ICOs as unregistered securities offerings.
- IRS Letter 6173
- IRS Letter 6173 is a crypto compliance letter that requires a response by a stated deadline, warning that the IRS has information suggesting you failed to report virtual currency transactions.
- IRS Letters 6174 and 6174-A
- IRS Letters 6174 and 6174-A are educational crypto compliance notices that do not require a response but signal that the IRS has your name from an exchange or summons.
J
- John Doe summons
- A John Doe summons is a court-approved IRS summons that compels a third party, such as a crypto exchange, to turn over records on a class of unnamed customers who may have failed to comply with tax law.
K
- Know your customer (KYC)
- Know your customer refers to the identity verification that exchanges and brokers must perform before opening an account, which is how a wallet address becomes connected to a name and Social Security number.
L
- Layer 2 network
- A Layer 2 is a network built on top of a base blockchain (Arbitrum, Optimism, Base, Lightning) to process transactions faster and cheaper, settling back to the base chain.
- LIFO (last in, first out)
- LIFO treats the most recently acquired units as the ones sold first. It is a form of specific identification and is allowed only with records identifying the units at the time of sale.
- Like-kind exchange (crypto)
- A like-kind exchange under Section 1031 lets taxpayers defer gain when swapping certain property, but since 2018 it applies only to real estate, so crypto-to-crypto trades are fully taxable.
- Liquid staking
- Liquid staking is depositing tokens with a protocol that stakes them and issues a receipt token you can trade or use in DeFi, and whether the deposit itself is a taxable exchange is an unsettled question.
- Liquidity pool
- A liquidity pool is a smart contract holding paired tokens that traders swap against, and depositing tokens into one usually means exchanging them for a pool token, which the IRS may treat as a taxable disposition.
M
- Margin and perpetual futures (crypto)
- Crypto margin trading and perpetual futures are leveraged positions, common on offshore platforms, whose gains and losses are generally taxed as capital gains and losses when positions close, with funding payments treated as income or expense.
- Memecoin
- A memecoin is a token created around a joke, meme, or community rather than a technical purpose. For tax purposes it is property like any other digital asset; the difference is how often it goes to zero.
- Mining income
- Mining income is the fair market value of coins received for validating transactions on a proof-of-work network, taxed as ordinary income when received and, for miners operating as a business, subject to self-employment tax.
N
- Non-fungible token (NFT)
- A non-fungible token is a unique blockchain token representing ownership of a digital or physical item, taxed as property when bought and sold and potentially as a collectible at a 28 percent maximum long-term rate.
- Notice 2014-21
- Notice 2014-21 is the IRS's foundational guidance on virtual currency, establishing that cryptocurrency is treated as property for federal tax purposes, so general property transaction rules apply rather than currency rules.
O
- Operation Hidden Treasure
- Operation Hidden Treasure is an IRS enforcement initiative launched in 2021 that pairs the civil Office of Fraud Enforcement with Criminal Investigation to find taxpayers who omit cryptocurrency income, using blockchain analytics contractors.
P
- Paying employees in crypto
- Wages paid in cryptocurrency are subject to income tax withholding, Social Security, and Medicare tax at the fair market value of the crypto on the payment date, and are reported on Form W-2 like cash wages.
- Pig butchering scam
- A pig butchering scam is a long-con investment fraud in which the victim is groomed over weeks or months, persuaded to move funds onto a fake trading platform, and then locked out when they try to withdraw.
- Play-to-earn gaming
- Tokens and NFTs earned in blockchain games are income at fair market value when you gain control of them, and selling them later is a capital transaction.
R
- Realized vs. unrealized gain
- A realized gain occurs when you dispose of a digital asset for more than its cost basis; an unrealized gain is an increase in value on an asset you still hold and is not taxed.
- Restaking
- Restaking commits already-staked tokens (or their liquid staking receipts) to secure additional protocols for extra rewards, layering income streams and unsettled tax questions on top of each other.
- Revenue Procedure 2024-28 safe harbor
- Revenue Procedure 2024-28 provided a one-time safe harbor letting taxpayers allocate their pre-2025 crypto cost basis across specific wallets before January 1, 2025, as the IRS moved to mandatory wallet-by-wallet accounting.
- Revenue Ruling 2019-24
- Revenue Ruling 2019-24 addresses hard forks and airdrops, holding that new tokens received and controlled after a fork are ordinary income at fair market value, while a fork that produces no new tokens to the taxpayer creates no income.
- Revenue Ruling 2023-14
- Revenue Ruling 2023-14 holds that a cash-method taxpayer who receives staking rewards must include their fair market value in gross income in the year the taxpayer gains dominion and control over them.
- Rug pull
- A rug pull is a crypto scam in which a project's developers abandon it and withdraw investor funds, leaving holders with a worthless token, and whether the loss is deductible as a theft loss or a worthless security depends on the facts.
S
- Seed phrase and private key
- A private key is the secret that controls a wallet; a seed phrase is the human-readable backup that regenerates it. Whoever holds them owns the assets, which is why loss and theft of keys are tax events in their own right.
- Self-custody wallet
- A self-custody wallet is one where the user controls the private keys, with no exchange or custodian, and although no third party reports its activity to the IRS, transactions in it are fully traceable on chain and fully taxable.
- Smart contract
- A smart contract is code deployed on a blockchain that executes automatically when its conditions are met; most DeFi, NFT, and token activity runs through them.
- Soft fork
- A soft fork is a backward-compatible change to a blockchain's rules that does not create a new coin, so it has no tax consequence for holders.
- Specific identification
- Specific identification is a cost basis method that lets you choose which units of a digital asset you are selling, provided you can identify them by acquisition date and cost and document the choice at the time of the transaction.
- Stablecoin
- A stablecoin is a digital asset designed to hold a fixed value, usually one dollar, and despite the stable price it is property for tax purposes, so trading into or out of one is a taxable event.
- Staking rewards
- Staking rewards are tokens received for validating transactions on a proof-of-stake network and are taxable as ordinary income at their fair market value when you gain control over them.
T
- Tax loss harvesting
- Tax loss harvesting is selling an asset at a loss to offset capital gains, and for crypto it is especially effective because the wash sale rule does not currently apply.
- Taxable event (crypto)
- A taxable event is any transaction that requires you to recognize gain, loss, or income, and for crypto that includes selling for dollars, trading one coin for another, spending crypto, and receiving crypto as income.
U
- Universal accounting (pre-2025)
- Universal accounting was the pre-2025 practice of pooling cost basis across all wallets and exchanges as if they were one account, which the IRS ended effective January 1, 2025 in favor of wallet-by-wallet tracking.
V
- Validator
- A validator runs a node that proposes and confirms blocks on a proof-of-stake network in exchange for staking rewards, and often stakes on behalf of others for a commission.
W
- Wallet-by-wallet accounting
- Wallet-by-wallet accounting is the IRS requirement, effective January 1, 2025, that cost basis for digital assets be tracked separately for each wallet or account rather than pooled across everything you own.
- Wash sale rule (crypto)
- The wash sale rule disallows a loss on a security sold and repurchased within 30 days, and as of 2026 it does not apply to cryptocurrency because digital assets are treated as property rather than securities.
- Worthless crypto
- A digital asset that has lost all value is not deductible merely because it is worthless; a loss generally requires a completed disposal, such as a sale for a nominal amount or an affirmative abandonment.
- Wrapped token
- A wrapped token is a token on one blockchain that represents an asset from another, such as wrapped Bitcoin on Ethereum, and whether wrapping is a taxable exchange is an unsettled question the IRS has not addressed directly.
Y
- Yield farming
- Yield farming is moving crypto between DeFi protocols to earn rewards, and each reward is ordinary income at its value on receipt while each move between protocols may be a taxable exchange.
