Basic crypto terms that anybody, willing to join the crypto community, must know.
Cryptocurrency is often a tough nut to crack, especially if you’re new to the crypto space. Here are some of the basic cryptocurrency-related terms that you must know if you want to explore the murky water of crypto!
A blockchain acts as a database, storing information in a decentralized platform. It can be accessed across computer network nodes. They are well known for their critical function in keeping a secure and decentralized record of transactions in cryptocurrency systems like Bitcoin. The most popular application of blockchain is cryptocurrency. Unlike currency, crypto employs blockchain to operate as a public ledger and an advanced cryptographic security system, ensuring that all online transactions are processed and safeguarded.
A cryptocurrency is a digital currency (also called virtual currency) that is protected by encryption, making counterfeiting and double-spending exceedingly difficult. It is monitored and verified by blockchain (a decentralized peer-to-peer network).
Cryptocurrencies are mined or bought on cryptocurrency exchanges. Not all e-commerce sites accept cryptocurrency payments. Nevertheless, cryptocurrencies' expected potential has made them prominent as trading instruments. They are also utilized for cross-border transactions to a limited degree.
A crypto exchange is a platform for buying and selling cryptocurrencies such as Bitcoin, Ether, and Dogecoin. Cryptocurrency exchanges function similarly to other trading platforms you might be acquainted with. They set up accounts for you where you may generate various order types to buy, sell, and predict in the cryptocurrency market.
In general, there are two types of cryptocurrency exchanges: centralized and decentralized exchanges. The presence or absence of intermediaries is the key distinction between centralized and decentralized exchanges.
Centralized cryptocurrency exchanges operate as an intermediary between buyers and sellers. Almost all cryptocurrency transactions happen through centralized exchanges because they are more reliable. Centralized cryptocurrency exchanges include Coinbase, GDAX, Kraken, and Gemini, to name a few.
Decentralized crypto exchanges, popularly known as DEXs, are blockchain-based apps that facilitate large-scale crypto asset trading among multiple users. Rather than having a centralized entity control the transactions and collect the fees, in a DEX, users known as liquidity providers pool their funds for other users to trade with, and are rewarded with a percentage of the swap fee.
Crypto wallets protect your private keys. This private key lets you send or receive cryptocurrencies such as bitcoin and Ethereum.
The cost basis of a token is the amount you paid in US dollars for it, plus any fees.
For instance, suppose you paid $500 to buy 1 ETH in 2019. So the cost basis will be $500, plus the fair value in USD of the gas fee to transfer it.
Some crypto taxes are categorized as capital gains and some as income taxes.
- Selling cryptocurrencies for fiat money, or government-issued money
- Payment for goods or services, such as buying a car using Bitcoin income
- The process of converting one cryptocurrency for another.
- Selling cryptocurrencies for fiat money, or government-issued money
- Payment for goods or services, such as buying a car using Bitcoin income
- The process of converting one cryptocurrency for another.
- DeFi lending
- Receiving airdropped crypto
- Mining, Staking and liquidity pools
- Crypto as a reward or bug bounty
- Earning from transaction fees or block rewards for crypto mining
- Token rewards from play-to-earn games like Axie Infinity
- NFT artists minting income
- DeFi lending
- Receiving airdropped crypto
- Mining, Staking and liquidity pools
- Crypto as a reward or bug bounty
- Earning from transaction fees or block rewards for crypto mining
- Token rewards from play-to-earn games like Axie Infinity
- NFT artists minting income
- Purchasing cryptocurrency with fiat currency
- Transfer cryptocurrency from one of your wallets to another one you control
- Crypto gifts are non-taxable to a certain limit
- Donate cryptocurrency to a tax-exempted non-profit organization
- Purchasing cryptocurrency with fiat currency
- Transfer cryptocurrency from one of your wallets to another one you control
- Crypto gifts are non-taxable to a certain limit
- Donate cryptocurrency to a tax-exempted non-profit organization
You must pay taxes (capital gains or income) when you sell your cryptocurrency, which may be computed using the formula:
Capital Gain = Price at the time of sale - Cost Basis
You'll suffer a capital loss if the value at the time of sale is larger than the cost at the time of acquisition. The accounting system you use to calculate your taxes determines how much tax you must pay and can potentially lower your taxes greatly.
The following are the most common tax accounting methods:
1. FIFO Cryptocurrency Cost Basis Method
2. LIFO Cryptocurrency Cost Basis Method
3. Specific Identification Cost Basis Method
One of two recognized ways for assessing the cost basis of Cryptocurrency is First in First Out (FIFO).
The difference between the sale price and the earlier buy price is used to compute capital gains under FIFO.
Last in, first out, or simply LIFO is an accounting approach for calculating gains based on the difference between the purchase price and the latest buying price.
A Cryptocurrency trader can define which asset it is trading and calculate profits or losses based on the cost basis of that particular asset using Specific Identification. The best tax strategy for limiting obligation is often specific identification.
The method of selling a cryptocurrency that has suffered a loss is known as tax-loss harvesting. Investors can reduce taxes on both profits and income (up to $3000) by "harvesting" the loss. To preserve an ideal investment strategy and predicted returns, the traded crypto can be restored in the portfolio.
Crypto airdrops are a type of distribution strategy used by cryptocurrency companies. It includes sending bitcoins or tokens to existing cryptocurrency traders' wallets for free or as a reward for participation.
When the program code changes so much that the latest version is no longer backward compatible with previous blocks, a hard fork occurs. The blockchain divides in two in this scenario:
- The original blockchain
- A new one that matches the bunch of rules
This results in the creation of a completely new cryptocurrency, which is the source of several well-known coins.
When the program code changes so much that the latest version is no longer backward compatible with previous blocks, a hard fork occurs. The blockchain divides in two in this scenario:
- The original blockchain
- A new one that matches the bunch of rules
This results in the creation of a completely new cryptocurrency, which is the source of several well-known coins.
ICO is short for initial coin offering. An ICO can be used by a firm to acquire funding for the development of a new cryptocurrency, software, or service.
To put it simply, the cryptocurrency industry's equivalent of an initial public offering (IPO) is an initial coin offering (ICO).
Margin trading is a method of conducting asset transactions utilizing funds supplied by a third party. Margin trading accounts, as opposed to standard trading accounts, allow traders to get extra funds and assist them in leveraging positions.
Mining is the method by which Bitcoin and other cryptocurrencies bring in new coins and validate new transactions. The miners authenticate and safeguard blockchains, which are virtual ledgers that record bitcoin transactions.
Proof of work (POW) systems verify transactions and reward miners with bitcoin in exchange for their efforts.
NFTs are individual tokens that contain important information. They can be purchased and sold like other physical pieces of art because their worth is mostly determined by the market and consumers. The distinctive data on NFTs makes it simple to verify their ownership as well as token transfers between owners.
Proceeds are the amount you made when you sold or exchanged a cryptocurrency. You will get a greater profits amount if you trade regularly.
It must be noted that you are not taxed exclusively on the profits you make. Rather, subtract your profits from your cost basis to determine your gain or loss.
The process of keeping cryptocurrency to validate transactions and sustain the network is known as staking. Staking allows you to earn money without having to work. The proof-of-stake system eliminates the need for specialized equipment and the related energy expenses that come with mining.
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Once each new block is added to the chain, the Ethereum Virtual Machine, also known as the EVM, computes the state of the Ethereum network and executes smart contracts. The hardware layer and node network layer of Ethereum are on top of the EVM.
A centralised exchange (CEX) is a third-party platform that allows the trading of crypto assets between buyers and sellers. It is privately run by a central entity.
Total value locked refers to the total amount of underlying supply that a certain application is fully securing. This value does not refer to the number of existing loans, but rather the total amount of underlying supply that is now being staked in a particular protocol.
The technical creation of the token on a blockchain-based network and its introduction to the market, typically in the form of a public sale, private sale, or initial coin offering, are both considered to be part of a token generation event (TGE), which is a brief commercial and technical act (ICO).
Gwei is a combination of the terms giga and wei. The digital token used on the Ethereum network, ether (ETH), has a unit called "gwei."
According to the political concept known as anarcho-capitalism, private property rights are what society needs, not governments.
Non-fungible tokens known as aNFTs (autonomous NFTs) have the ability to be programmed to start transactions on their own.
Adaptive state sharding automatically divides data depending on specific parameters to increase performance and effectiveness.
The Winklevoss twins have since bought Nifty Gateway, a digital art online auction site for non-fungible token art that was developed by Duncan and Griffin Cock Foster.
In the cryptocurrency sector, a rug pull occurs when a development team abruptly drops a project and sells or eliminates all of its liquidity. The expression "take the rug out from under (someone)" is the origin of the word, which refers to abruptly ending assistance.
The phrase "mainnet" refers to a fully functional, operating blockchain. Like the blockchains for Bitcoin and Ethereum, a mainnet network has been completely implemented and is now in use.
Ethereum was created by Russian-Canadian computer programmer Vitaly "Vitalik" Buterin. Buterin became active with cryptocurrencies in the very beginning, helping to launch Bitcoin Magazine in 2011.
A system called 0x makes peer-to-peer (P2P) trading of Ethereum-based assets possible. The protocol, created by 0x Labs, is an open standard and fundamental DeFi building component for any developer in need of exchange capability.
The phrase "fee tiers" refers to the fee structure that establishes the cost associated with an investor's money deposit or withdrawal and transaction execution on a cryptocurrency exchange. Every exchange has a unique fee structure that frequently varies based on trade volume and kind.
The annual percentage yield (APY) of an interest-bearing account, such as a savings account or certificate of deposit (CD), is the amount you may expect to make in a single year.
A cryptocurrency startup can launch its native token or coin on a decentralised exchange using the initial DEX Offering (IDO) crowdfunding approach (DEX).
The Ethereum network had a hard fork known as Byzantium in October 2017 at block 4,370,000. The Ethereum network underwent a crucial upgrade with the Byzantium hard fork.
In the LBRY decentralised blockchain, there is a video sharing service called Odysee.
A layer-2 scalability method known as zero-knowledge rollups, or zk-rollups, enables blockchains to validate transactions more quickly while simultaneously guaranteeing that gas costs are kept to a minimum.
Simplifying DeFi, NFT, and Crypto Taxes for Investors and Tax Professionals
Copyright © 2022 ZenLedger
10400 NE 4th St, Floor #5,
Bellevue, WA 98004, USA
Simplifying DeFi, NFT, and Crypto Taxes for Investors and Tax Professionals
Copyright © 2022 ZenLedger
10400 NE 4th St, Floor #5,
Bellevue, WA 98004, USA
