Contextual filter with a block view
In general, the reason this block isn't working is that a block does not have an assigned path and the contextual filter does not have a path to work on.  To connect the block to a path return to the contextual filter settings and in the section What to do if the URL is not available select Provide default value and select Raw value from URL from the dropdown box. From the Path Component box select the position in the URL that your contextual filter gets its value.

In your specific case you have told the view to interpret the URL as a taxonomy term and that is probably not the format of your URL (taxonomy/term/tid). The Views UI is a bit misleading in that it suggests that the alias can be used in the contextual filter when it does not.  Drupal converts the alias to the base URL value when it calls the view and that is what is directly available in the contextual filter.  To use the alias you must specifically inform it as described above.  Views is powerful, but a bit tricky to use.  One tool you can use if you have some experience with SQL queries, is to turn on the display of the queries in the View preview display in the Settings tab.  This will tell you what views is trying to do when the view is called.

More can be found on this issue at this question