Cryptocurrency Glossary

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!

1. Blockchain

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.

2. Cryptocurrency

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.

3. Cryptocurrency Exchange

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 Exchange

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 Exchange

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.

4. Cryptocurrency Wallet

Crypto wallets protect your private keys. This private key lets you send or receive cryptocurrencies such as bitcoin and Ethereum.

5. Cost Basis

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.

6. Taxable Crypto Events

Some crypto taxes are categorized as capital gains and some as income taxes.

Capital Gains & Loss Events

- 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.

Income Tax Events

- 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

7. Non-Taxable Crypto Events

- 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

8. Crypto Tax Accounting Method

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

FIFO Cryptocurrency 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.

LIFO Cryptocurrency Cost Basis Method

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.

Specific Identification Cost Basis Method

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.

9. IRS Tax Forms

Tax Form Purpose
Form 8949 (Sales and Other Dispositions of Capital Assets) Complete summary of all crypto activities like, selling, trade, etc.
Schedule D (Capital Gains and Losses) Summary of your Form 8949 and includes the sum total of short term and long term capital gains
Form 1040 (Individual Income Tax Return) Calculates total taxable income
Schedule 1 Your total additional income from crypto activities
Form 1099 K Report non-employment income to the Internal Revenue Service.

10. Crypto Tax-Loss Harvesting

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.

11. Miscellaneous Terms

Airdrop

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.

Hard Fork

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

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

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

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.

Non-Fungible Tokens

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

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.

Staking

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.

Simplifying DeFi, NFT, and Crypto Taxes for Investors and Tax Professionals.

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Simplifying DeFi, NFT, and Crypto Taxes for Investors and Tax Professionals

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Copyright © 2022 ZenLedger
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