Everything You Need to Know About Crypto Token Taxes

Jun 19, 2023

Crypto Basics

There are many ways that a project can raise funds. A few examples include token taxes, team-owned trading bots, and tokens held back during minting. As an investor, it is essential to understand why the team is raising funds and how they intend to use them. Today, we will focus on:

  • Why Do Crypto Projects Need Funds?

  • What Are Token Taxes?

  • Do All Tokens Have a Tax?

  • How Do I See What a Token's Taxes Are?

First things first, let's dive into WHY a token needs funds to operate.

Why Do Crypto Projects Need Funds?

Understanding why a crypto project needs funds depends on the type of project and the items on their roadmap. Project funds can be very beneficial to investors as they can be used to develop new utilities, marketing efforts, exchange listings, servers, or pay the team members for their ongoing work.

Some projects have no utility, so any funds received go directly into the teams. Understanding how the project funds will be allocated is part of the DYOR (Do Your Own Research) process you hear constantly.

What are Token Taxes?

Token taxes are fees the team collects when an investor buys, sells, or transfers the token. This fee is almost exclusively displayed as a percentage - so you may see it as "5% buy, 5% sell taxes." Most contracts have their buy and sell taxes set separately, and a team can set their tax anywhere between 0% and 100%. So if a token has a 5% buy tax and you buy $100 of the token, you will get $95 worth of the token in your wallet, and the team will get $5 in theirs to further the project.

Learn how to generate tax reports for your crypto investments with CoinStats. Stay compliant and gain insights into your crypto portfolio's tax implications.

Do All Tokens Have a Tax?

No, not all tokens have a tax on buy, sell, or transfer transactions. The token's team sets taxes and can differ for each transaction type. Taxes can also be changed and have maximum percentages set if the team built that into the token's contract.

So is a token with 0% tax a good thing? Not necessarily.

Remember that we mentioned multiple ways for a project to raise funds. If a token has zero tax, the next question you should ask is, "How is the project making money?" If the team holds a massive amount of tokens, they could dump them when they are ready to cash out. Alternatively, many teams run whitelisted trading bots which can compete with investor trading, or even slowly drain the liquidity from the token.

How Do I See What a Token's Taxes Are?

The Quick Intel scanner shows you a token's taxes in an easy-to-read manner. In addition, the scanner will tell you if the taxes can be changed and if there are built-in limits to ensure the taxes cannot be raised above a certain percentage.

So next time you're doing your own research on a token, be sure to use the Quick Intel Scanner to take a look at the tax breakdown!