CRYPTO TAX TERMS.
EXPLAINED LIKE YOU'RE HUMAN.

Simple Definition:

The amount you paid for a crypto asset, including all fees (exchange fees, network fees, etc.). This is the starting point for calculating your capital gains or losses when you sell or trade.

Why It Matters:

The IRS wants to know how much you gained or lost on each crypto transaction. Your cost basis is subtracted from the sale price to determine your taxable gain. Get this wrong, and you'll either overpay taxes or face an audit.

Real Example:

You bought 1 ETH on Coinbase for $2,000. Coinbase charged a $20 fee. Your cost basis is $2,020 (purchase price + fee). Later, you sell that ETH for $2,500. Your capital gain is $2,500 - $2,020 = $480.

Related Terms:

Simple Definition:

Any crypto transaction that creates a tax reporting obligation. Not every crypto activity triggers taxes—only specific types of transactions.

Why It Matters:

Understanding what is and isn't a taxable event helps you avoid surprise tax bills. Many people don't realize swapping crypto-to-crypto is taxable (it is). Others think buying crypto with USD is taxable (it's not).

Real Example:

Related Terms:

Simple Definition:

The unrealized loss that occurs when you provide liquidity to an automated market maker (AMM) like Uniswap. If the price of your deposited tokens changes relative to each other, you could end up with less value than if you'd just held the tokens.

Why It Matters:

The IRS doesn't have clear guidance on impermanent loss, but most tax professionals treat it as a capital loss when you withdraw liquidity. The tricky part: tracking the changing cost basis of your LP tokens while they're still in the pool.

Real Example:

You deposit 1 ETH ($2,000) + 2,000 USDC into a Uniswap pool. Total: $4,000. ETH price doubles to $4,000. When you withdraw, you get 0.707 ETH ($2,828) + 2,828 USDC. Total: $5,656.

But if you'd just held, you'd have 1 ETH ($4,000) + 2,000 USDC = $6,000. The $344 difference is impermanent loss.

Related Terms:

Simple Definition:

A cost basis accounting method where you assume the first crypto you bought is the first crypto you sold. Like a grocery store selling milk—oldest goes out first.

Why It Matters:

FIFO is the IRS default method. If you don't specify otherwise, the IRS assumes you're using FIFO. In rising markets, FIFO usually results in higher capital gains (you're selling the cheapest coins first). In falling markets, it can reduce gains.

Real Example:

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