Crypto Tax Glossary

Understanding cryptocurrency tax terminology is essential for accurate IRS reporting. This glossary defines over 30 key terms used in crypto tax calculation, organized alphabetically with references to relevant IRS guidance. Whether you are a first-time crypto filer or a tax professional managing multiple clients, these definitions provide the foundation for navigating digital asset taxation.

A

Airdrop

A distribution of cryptocurrency tokens sent to wallet addresses, typically for free, as part of a marketing campaign, protocol launch, or governance distribution. Under IRS Revenue Ruling 2019-24, airdrops are taxable as ordinary income at fair market value when the recipient gains dominion and control over the tokens.

Adjusted Basis

See Cost Basis. Adjusted basis accounts for any additions (e.g., transfer fees) or reductions to the original cost basis of an asset over time. Per IRS Publication 551, adjustments to basis include capital improvements and certain fees.

C

Capital Gains (Short-Term)

Profit from selling or disposing of a capital asset held for one year or less. Short-term capital gains are taxed at ordinary income tax rates (10-37% for 2025 under IRC Section 1(j)). Reported on Form 8949 in Box A, B, or C.

Capital Gains (Long-Term)

Profit from selling or disposing of a capital asset held for more than one year. Long-term capital gains receive preferential tax rates of 0%, 15%, or 20% under IRC Section 1(h). Reported on Form 8949 in Box D, E, or F.

Capital Loss

A loss realized when a capital asset is sold for less than its cost basis. Capital losses offset capital gains dollar for dollar, and up to $3,000 of net capital losses can be deducted against ordinary income annually under IRC Section 1211(b). Excess losses carry forward indefinitely under IRC Section 1212(b).

Cost Basis

The original value of an asset for tax purposes, typically the purchase price plus acquisition costs such as trading fees and gas fees. Per IRS Publication 551, cost basis includes all costs of acquiring the property. When you sell crypto, your gain or loss equals proceeds minus cost basis.

Covered Transaction

A transaction for which a broker is required to report cost basis to the IRS on Form 1099-DA. Starting with the 2025 tax year, centralized exchanges report covered transactions under IRC Section 6045 as amended by the Infrastructure Investment and Jobs Act (Public Law 117-58).

D

DeFi (Decentralized Finance)

Financial services built on blockchain smart contracts that operate without centralized intermediaries. DeFi activities — including token swaps, lending, borrowing, and liquidity provision — create taxable events under IRS Notice 2014-21. On April 10, 2025, Congress repealed the DeFi broker reporting rule, meaning decentralized protocols are not required to issue 1099-DA forms.

Disposition

Any event where you give up ownership of a capital asset, including sales, trades, gifts, and exchanges. Each disposition of cryptocurrency is a taxable event requiring gain or loss calculation under IRS Notice 2014-21, Q&A 6.

F

Fair Market Value (FMV)

The price at which property would change hands between a willing buyer and willing seller, neither being under compulsion, with both having reasonable knowledge of relevant facts. Per IRS Publication 561, FMV for cryptocurrency is typically the exchange price at the time of the transaction.

FIFO (First In, First Out)

A cost basis accounting method that assumes the earliest-acquired units of cryptocurrency are sold first. FIFO is the IRS default method when no specific identification is made. In a rising market, FIFO typically produces higher gains (and higher taxes) because older, lower-cost lots are sold first.

Fork (Hard Fork)

A protocol change that creates a new cryptocurrency from an existing blockchain. Under IRS Revenue Ruling 2019-24, tokens received from a hard fork are taxable as ordinary income at fair market value when the taxpayer gains dominion and control — typically when the tokens appear in a wallet the taxpayer controls.

Form 8949

The IRS form used to report sales and dispositions of capital assets, including cryptocurrency. Each transaction is listed with the date acquired, date sold, proceeds, cost basis, and gain or loss. Totals from Form 8949 flow to Schedule D (Form 1040).

G

Gas Fees

Transaction fees paid to blockchain validators for processing transactions, denominated in the network's native token (e.g., ETH for Ethereum). Gas fees paid to acquire an asset are added to cost basis (IRS Publication 551). Gas fees paid on sales reduce proceeds. Using crypto to pay gas is itself a taxable disposition.

H

HIFO (Highest In, First Out)

A cost basis method that sells the units with the highest cost basis first, minimizing taxable gains. Under IRS rules, HIFO is treated as a subcategory of Specific Identification — you must adequately identify the specific units being sold per IRS FAQ Q39.

Holding Period

The length of time an asset is held, which determines whether gains are short-term or long-term. Under IRC Section 1222, property held for one year or less produces short-term gains/losses, while property held for more than one year produces long-term gains/losses. The holding period begins the day after acquisition.

I

Impermanent Loss

The difference in value between holding tokens in a liquidity pool versus simply holding them in a wallet. Impermanent loss occurs when the price ratio of pooled tokens changes. The IRS has not issued specific guidance on impermanent loss, but it may be relevant for calculating gain or loss when withdrawing from a liquidity pool.

L

LIFO (Last In, First Out)

A cost basis method that assumes the most recently acquired units are sold first. In a rising market, LIFO typically produces lower gains because newer, higher-cost lots are sold first. Like HIFO, the IRS treats LIFO as a subcategory of Specific Identification requiring adequate identification of units sold.

Like-Kind Exchange

Under IRC Section 1031, certain exchanges of property of "like kind" can defer capital gains taxation. The Tax Cuts and Jobs Act of 2017 limited like-kind exchanges to real property, explicitly excluding cryptocurrency. Crypto-to-crypto trades after December 31, 2017, are taxable events, not like-kind exchanges.

Liquidity Pool

A smart contract holding reserves of two or more tokens that facilitates decentralized trading. Depositing tokens into a liquidity pool, receiving LP tokens, and withdrawing liquidity all create potential taxable events. The IRS has not issued specific guidance on liquidity pool taxation, but general property disposal rules under Notice 2014-21 apply.

M

Mining

The process of validating transactions and creating new blocks on a proof-of-work blockchain, earning cryptocurrency rewards. Under IRS Notice 2014-21, Q&A 8, mined cryptocurrency is taxable as ordinary income at fair market value when received. If mining constitutes a trade or business, self-employment tax (15.3% under IRC Section 1401) also applies.

N

NFT (Non-Fungible Token)

A unique digital asset representing ownership of a specific item (art, music, collectibles, etc.). NFTs are taxed as property under IRS Notice 2014-21. Under IRS Notice 2023-27, certain NFTs may be classified as collectibles subject to a 28% maximum long-term capital gains rate under IRC Section 408(m).

Noncovered Transaction

A transaction for which a broker is not required to report cost basis to the IRS. The taxpayer is responsible for determining and reporting cost basis for noncovered transactions. DeFi transactions and transfers between wallets are typically noncovered.

O

Ordinary Income

Income taxed at regular income tax rates (10-37%), as opposed to preferential capital gains rates. Crypto activities that generate ordinary income include mining, staking rewards (Rev. Rul. 2023-14), airdrops (Rev. Rul. 2019-24), and payment for goods or services.

P

Proceeds

The total amount received from selling or disposing of an asset, before subtracting cost basis. Proceeds may be in fiat currency, cryptocurrency, or other property. For Form 8949 reporting, proceeds equal the sale price minus selling expenses.

R

Realized Gain/Loss

A gain or loss that becomes taxable because the asset has been sold or disposed of. Unrealized gains/losses (paper gains/losses on assets still held) are not taxable. A gain or loss is realized at the moment of disposition under IRC Section 1001.

S

Schedule D

The IRS form (Form 1040, Schedule D) used to report overall capital gains and losses. Schedule D summarizes the totals from Form 8949 and calculates your net capital gain or loss. The $3,000 net capital loss deduction (IRC Section 1211(b)) is calculated on Schedule D.

Specific Identification

A cost basis method where the taxpayer identifies exactly which units of cryptocurrency are being sold in each transaction. Per IRS FAQ Q39, Specific Identification requires that the taxpayer can adequately identify the specific unit being sold or disposed of and substantiate the basis. This method provides the most flexibility for tax optimization.

Staking

The process of locking cryptocurrency in a proof-of-stake network to validate transactions and earn rewards. Under IRS Revenue Ruling 2023-14, staking rewards are taxable as ordinary income at fair market value when the taxpayer gains dominion and control over them.

T

Tax Lot

A record of a specific cryptocurrency acquisition, including the date, quantity, cost basis, and source. When you sell crypto, the tax engine matches the disposal against one or more tax lots using your chosen cost basis method (FIFO, LIFO, HIFO, or Specific Identification) to calculate gain or loss.

TXF (Tax Exchange Format)

A standardized file format (V042) for transferring tax data between financial software and tax preparation programs like TurboTax. TXF files encode Form 8949 transaction details including dates, amounts, gains/losses, and box classifications for direct import into tax filing software.

W

Wash Sale

Under IRC Section 1091, a rule that disallows a tax loss deduction if you purchase a "substantially identical" security within 30 days before or after the sale. As of the 2025 tax year, the wash sale rule applies to securities but has not been formally extended to cryptocurrency by the IRS. The PARITY Act, if enacted, would extend wash sale rules to digital assets.

Wrapped Token

A token on one blockchain that represents a token from another blockchain (e.g., WBTC is wrapped Bitcoin on Ethereum). Wrapping and unwrapping tokens may create taxable events depending on whether the transaction is treated as a disposition. The IRS has not issued specific guidance, but the conservative approach treats wrapping as a taxable exchange.

Y

Yield Farming

The practice of moving cryptocurrency between DeFi protocols to maximize returns through lending, liquidity provision, staking, or other mechanisms. Each yield farming action — depositing, withdrawing, harvesting rewards, compounding — may create taxable events. Yield farming income is generally taxable as ordinary income at fair market value when received.

Frequently Asked Questions

Where can I find official IRS guidance on cryptocurrency taxes?

The primary IRS guidance documents are: IRS Notice 2014-21 (treating crypto as property), Revenue Ruling 2019-24 (airdrops and hard forks), Revenue Ruling 2023-14 (staking rewards), IRS Notice 2023-27 (NFT collectible classification), and the IRS FAQs on Virtual Currency Transactions. Additionally, IRC Section 6045 (as amended by the Infrastructure Investment and Jobs Act) governs broker reporting on Form 1099-DA. All documents are available on irs.gov.

What tax form do I use for crypto?

Report individual cryptocurrency sales and dispositions on Form 8949 (Sales and Other Dispositions of Capital Assets), with totals flowing to Schedule D (Form 1040). Ordinary income from mining, staking, and airdrops goes on Schedule 1, Line 8z. Self-employment income from crypto activities goes on Schedule C. Starting with tax year 2024, Form 1040 includes a Digital Asset question requiring disclosure of any digital asset transactions.

How long should I keep crypto tax records?

The IRS generally recommends keeping records for at least three years from the filing date (IRS Publication 552). However, for cryptocurrency, you should keep records for as long as you hold the asset plus three years after disposing of it, because cost basis must be tracked from acquisition through disposal. If you have capital loss carryforwards under IRC Section 1212(b), keep records until the carryforward is fully used. Many tax professionals recommend keeping crypto records for seven years or indefinitely.