In Agile Software Development (ASD) effort estimation plays an important role during release and iteration planning. The state of the art and practice on effort estimation in ASD have been recently identified. However, this knowledge has not yet been organized. The aim of this study is twofold: (1) To organize the knowledge on effort estimation in ASD and (2) to use this organized knowledge to support practice and the future research on effort estimation in ASD. We applied a taxonomy design method to organize the identified knowledge as a taxonomy of effort estimation in ASD. The proposed taxonomy offers a faceted classification scheme to characterize estimation activities of agile projects. Our agile estimation taxonomy consists of four dimensions: estimation context, estimation technique, effort predictors and effort estimate. Each dimension in turn has several facets. We applied the taxonomy to characterize estimation activities of 10 agile projects identified from the literature to assess whether all important estimation-related aspects are reported. The results showed that studies do not report complete information related to estimation. The taxonomy was also used to characterize the estimation activities of four agile teams from three different software companies. The practitioners involved in the investigation found the taxonomy useful in characterizing and documenting the estimation sessions. © 2017 The Author(s).