What Is Token tax?
A “token” tax is a term often used to describe tokens with transfer fees that cause deflation or redistribute trade profits to the protocol development:
Each time a token is transferred, some transferred amount is burned, redirected to a development fund or otherwise “taxed”.
Token tax is usually paid by the originator wallet that initiates the transfer. The tax is taken from the sent amount during the transfer: initiated transfer amount > received transfer amount.
Token tax may also reduce the token supply, thus creating deflationary tokens. The deflationary assumption comes from the economic theory that by reducing the supply, the value of the goods should go up. The most famous cryptocurrency having such deflationary mechanics is Ethereum and its EIP-1559 burning mechanism.
Token tax can redirect some of the transfer and trading fees to the protocol development fund. This can guarantee sustainable protocol development outside any initial fundraising.
Usually, the token tax term is not used for the native gas token on a blockchain, like Ether (ETH) on Ethereum, where any transfer fee is considered to be a natural part of the core protocol. The token tax term applies to ERC-20-like tokens that historically have lacked transfer fee features. There is no terminology standard, so different terms are applied in different contexts.
Different % amounts of “taxes” may apply to different types of transactions like buy, sell, and treasury management.
Read more about token tax in our introduction blog post.
Taxed tokens are not supported by Uniswap 3. Note that any bridged tokens cannot have transfer fees, so if you bridge a taxed token from Ethereum mainnet e.g. to Polygon it will work on Uniswap v3.