Crypto Tax Glossary: Essential Terms for 2025

Airdrop

A distribution of free tokens to wallet addresses, often used as a promotional tool or governance incentive. The IRS considers airdropped tokens taxable income at their fair market value (FMV) when received.

Altcoin

Any cryptocurrency other than Bitcoin. Some altcoins are classified as commodities, while others may be considered securities by regulators.

Basis (Cost Basis)

The original purchase price of a crypto asset, plus any associated transaction fees. The cost basis is crucial for calculating capital gains or losses upon sale or trade.

Capital Gain/Loss

The profit or loss realized when selling or exchanging crypto. If an asset is sold for more than its cost basis, it results in a capital gain; if sold for less, it results in a capital loss.

• Short-Term Capital Gain: Applies to assets held for one year or less, taxed at ordinary income rates.

• Long-Term Capital Gain: Applies to assets held for over one year, taxed at preferential rates (0%, 15%, or 20%, depending on income).

Crypto Wash Sale Rule (Pending Legislation)

Currently, crypto transactions are not subject to the wash sale rule (which prohibits selling a security at a loss and repurchasing it within 30 days to claim a tax deduction). However, proposed legislation aims to apply this rule to digital assets in the future.

Decentralized Finance (DeFi)

A blockchain-based financial ecosystem that enables lending, borrowing, and trading without traditional intermediaries. Tax treatment varies by transaction type (e.g., lending rewards may be treated as ordinary income, while the IRS has provided limited guidance on more complex DeFi arrangements).

Fair Market Value (FMV)

The price at which a crypto asset would sell in an open market. Used by the IRS to determine taxable income for transactions like airdrops, mining, and staking rewards.

FIFO (First-In-First-Out)

A cost basis accounting method where the first crypto purchased is the first sold. Often used for tax reporting, but it may not always be the most tax-efficient.

Fork (Hard Fork & Soft Fork)

• Hard Fork: A major blockchain protocol change that creates a new, separate token. The IRS considers newly received hard fork tokens taxable as income at FMV when received.

• Soft Fork: A network upgrade that does not result in new tokens and thus has no tax implications.

Form 1099 (MISC, NEC, B)

The IRS requires different 1099 forms depending on the type of income:

• Form 1099-MISC may be issued if you earn more than $600 in crypto rewards, staking income, or airdrops.

• Form 1099-NEC often covers nonemployee compensation, which can apply to certain crypto payments for services.

• Form 1099-B is typically issued for brokered transactions; new rules may require exchanges or other platforms (acting as “brokers”) to report crypto trading activity via Form 1099-B in the coming years.

Form 8949

Used to report sales and dispositions of crypto assets, detailing capital gains and losses. Transactions listed here are summarized on Schedule D of Form 1040.

Gas Fees

Transaction fees paid on blockchain networks (e.g., Ethereum). Gas fees may be deductible as an investment expense or added to the cost basis, depending on their purpose (e.g., whether they are for acquiring a new asset or facilitating a trade).

HIFO (Highest-In-First-Out)

A cost basis accounting method where the most expensive crypto purchased is the first sold. HIFO can minimize capital gains if you have significantly different purchase prices.

Income Tax on Crypto

Crypto earned through staking, mining, airdrops, or salary payments is considered ordinary income and is taxed at your marginal income rate.

Like-Kind Exchange (Repealed)

Prior to 2018, some taxpayers argued that crypto-to-crypto trades qualified for Section 1031 like-kind exchanges, deferring tax liability. The Tax Cuts and Jobs Act (TCJA) clarified that like-kind exchanges now apply only to real estate.

LIFO (Last-In-First-Out)

A cost basis accounting method where the most recently purchased crypto is the first sold. LIFO can reduce tax liabilities in certain cases, but it must be applied consistently once chosen.

Mining

The process of validating blockchain transactions. Mined crypto is taxed as ordinary income at FMV when received and may also incur self-employment tax if the mining constitutes a trade or business rather than a hobby.

NFT (Non-Fungible Token) Taxation

The IRS treats NFTs as property. Buying, selling, or trading NFTs triggers taxable events, while NFT creators may owe self-employment tax on sales if they are operating as a business.

Ordinary Income

Income earned through wages, mining, staking, airdrops, or payments in crypto. Taxed at your marginal tax rate.

Play-to-Earn (P2E) Gaming

Earnings from blockchain-based games (e.g., Axie Infinity) are taxable as ordinary income at the time of receipt.

Realized Gain/Loss

A capital gain or loss that occurs when a crypto asset is sold or exchanged. Unrealized gains/losses (holding assets without selling) are not taxable.

Recordkeeping

The IRS requires accurate records of all crypto transactions, including:

• Dates of purchase and sale

• Cost basis

• Fair market value at disposal

• Transaction fees

Failing to keep records can result in tax penalties or difficulty proving your tax positions under audit.

Schedule D

A section of Form 1040 used to report capital gains and losses from crypto and other investments. Form 8949 feeds into Schedule D.

Self-Employment Tax

Crypto earned through freelancing, staking, mining, or other services may be subject to the 15.3% self-employment tax in addition to income tax if those activities rise to the level of a trade or business. Hobby activities don’t typically incur self-employment tax, though hobby losses are also generally disallowed.

Stablecoin

A cryptocurrency pegged to the value of a fiat currency (e.g., USDT, USDC). Trading stablecoins can still trigger taxable events if you dispose of one asset to acquire another.

Staking

Locking up crypto in a proof-of-stake network in exchange for rewards. Staking rewards are taxable as ordinary income at the time they are received.

Taxable Event

Any transaction that triggers a tax obligation, including:

• Selling crypto for fiat

• Trading one crypto for another

• Using crypto to buy goods or services

• Earning crypto as income

• Receiving an airdrop or staking reward

Tax Loss Harvesting

A strategy where investors sell crypto at a loss to offset capital gains. Crypto is currently not subject to the wash sale rule, making tax loss harvesting more flexible than with stocks. (However, stay alert to potential legislative changes.)

Unrealized Gain/Loss

A change in the value of an asset that has not yet been sold. Unrealized gains are not taxable until realized.

Wallet-Based Cost Basis (Proposed Changes for 2025)

Under the Infrastructure Investment and Jobs Act, expanded broker reporting rules for digital assets are slated to take effect in 2025. While some experts believe that each wallet may need its own cost basis tracking, final IRS regulations have not yet been published. Stay tuned for official guidance on how this will impact your recordkeeping.

Wrapped Token

A tokenized version of another crypto asset, allowing it to be used on different blockchains (e.g., WBTC is Bitcoin “wrapped” on Ethereum). Swapping to or from a wrapped token is generally treated as a taxable event by many practitioners, although the IRS has not issued explicit guidance. The conservative approach is to treat wrapping as a disposition.