A step by step guide on how to trade tax tokens
The decentralized finance (DeFi) ecosystem continues to grow, offering a wide array of tokens to trade. One peculiar category you might come across is "tax tokens"—tokens that have an in-built tax for buying or selling or even transfering. This guide aims to help you navigate the intricacies of trading tax tokens on SushiSwap.
What are Tax Tokens?
Tax tokens are cryptocurrencies that have a built-in transaction fee, or "tax," for each buy, sell order or transfer. The tax usually serves specific functions such as providing liquidity, rewarding holders, or funding a project's development. Tax tokens are mostly found on EVM (Ethereum Virtual Machine) compatible chains. Trading these tokens can be a bit different than what you're accustomed to, primarily because of the embedded tax.
How Do You Know You're Trading a Tax Token?
If you're interested in a token and want to find out whether it comes with a transaction tax, you need to pay attention to the user interface (UI) while placing a trade. If the UI displays a message such as "Low slippage: This transaction will not succeed either due to price movement or fee on transfer. Try increasing your slippage tolerance" (as shown below), it's a strong indication that you're dealing with a tax token. Because SushiSwap is multi-chain, it can detect tax tokens from any EVM-compatible chains, providing an added layer of convenience for traders.
While the UI warning mentioned above is a good indicator, it's not foolproof. The message might appear for other reasons, such as high volatility. However, a persistent "low slippage" warning when trying to swap could indicate that a tax token is in play.
What Should You Do?
When you encounter this warning message, the next step is to adjust your slippage tolerance. The tax imposed by the token needs to be factored into the slippage settings. For example, if the token has a 5% tax, you would add that to your original slippage tolerance—let's say 0.5%. So, you'd set your new slippage tolerance to 5.5%.
Sushi is committed to offering the best possible user experience (UX) for all types of tokens, including tax tokens. We are actively working on upgrading the swap feature to automatically recognize and adjust price for tax tokens, streamlining the process for our users.
By following these steps and keeping an eye out for UI clues, you'll become familiar with trading tax tokens on Sushi. Stay tuned for upcoming improvements that will make the process even smoother.
Happy trading! 🚀