Hi Liz,
A 2.5 gallon tank is far too small for an axolotl, the bare minimum size tank for an axolotl is 10 gallons and this is for a juvenile, as the axolotl grows bigger he will need a two foot tank at least.
I would advise you to remove that substrate, it's the size that can be ingested by the axolotl and cause impaction which can be deadly if the axolotl can not pass it, and judging from the looks of your axie's stomach he has swallowed some.
You can keep the axolotl on a bare bottom floor or use sand. Suitable sands are childrens play sand as this has been sterilized for use by children, pool filter sand or fresh water aquarium sand sold at most aquariums. Do not use Beach sand or marine sand.
If you can, move the tank away from the sunlight - axolotl's do not like light. If the tank can not be moved, then you will need to provide the axolotl with some hides so he can get away from the light.
The white fluff I would say is fungus. The usual suspects for fungus is poor water quality, warm water or stress.
You will need to commence salt baths and fridging, the fridging as well as aiding in the removal of the fungus will also help the axolotl pass the gravel.
Salt bath procedure to treat the fungus:
Prepare a tub of fresh dechlorinated water and dissolve 2-3 teaspoons of salt per litre of water. Put in enough water to cover the axolotl and leave axolotl in the salt bath for about 10 minutes, no longer than 15 minutes as the salt will start to damage the axolotl's gills/skin. Salt bath should be done 2-3 times daily.
Prepare another tub of fresh dechlorinated water for the axolotl, and place tub in the fridge. Ensure that the fridge is set for at least 5 degrees celcius, no lower than this.
You will need to also keep bottles of dechlorinated water in the fridge, these will be used for the 100% water changes that must be done daily. These will also be used for the salt baths. The idea of this is to ensure the temporary home and salt baths are at a constant temperature to ensure the axolotl is not subjected to temperature shock.