What is meant when a spice is water-soluble?
"Water soluble" vs. "fat soluble" refer to the flavor of the spice, rather than the physical leaves, seeds, or grains.  That is, if you put a bunch of basil leaves (especially dried ones) in a glass of warm water, and leave it for a few minutes, the water will continue to taste like basil even after you've strained out the leaves.  With fat soluble spices like whole cumin seeds, you generally need to "bloom" them in hot fat (like butter or vegetable oil) for their flavors to spread.  As a rule, all spices are fat-soluble but some are water-soluble as well.

Of course, in reality almost all spices are both water and fat soluble to some degree.  It's just that some spices spread their flavor much better in fat that in water.