Tokens with a buy tax or sell tax, known as fee-on-transfer tokens (FoT), are custom tokens that take an extra fee when they are moved to a new address. Many popular tokens include this custom behavior even though you and the DEX you’re using may not know it, leading to failed trades, misleading price impact warnings, and receiving less in your wallet than you were quoted.

Trying to trade tokens with a buy tax or sell tax can be frustrating. In many cases, your DEX will prompt you to increase slippage in order to increase the chances your trade will complete, but also increasing the chance you’ll be sandwich attacked and hit by another form of MEV, costing you money. Matcha fixes this by proactively detecting transfer taxes at the moment you trade to improve the trading experience. 

The best way to trade fee on transfer tokens

Matcha is the most reliable and transparent place to trade fee-on-transfer tokens with buy or sell taxes because we simulate every trade in real-time to detect the exact tax amount and return an accurate quote. This is not only important for transparency, but is necessary for the trade to settle. 

Other DEXs rely on external detection tools for this information. The problem is these services tend to keep a static database of taxes, which quickly become outdated or fail to capture how the logic behind these rules work in their entirety. For example, some buy/sell taxes are only triggered in certain trade scenarios, or change dynamically based on trade size or wallet addresses.

Knowing if a tax is present at the time of trading is crucial for trading fee-on-transfer tokens: you need to know how many tokens you will get, while your DEX needs to create a transaction that accounts for both taxes and network fees, or the trade will either fail or cost more than it should. Matcha calculates exactly how many tokens you will receive when you swap, resulting in much lower failure rates and the most up-to-date information about buy or sell taxes, letting you trade without unexpected surprises. 

The Matcha interface warns you about buy or sell taxes directly in the trade module whenever they are detected. By simulating the trade in real time, this also helps you avoid losing money to hidden taxes that only appear under specific conditions, and Matcha then routes your trade through AMMs that support these taxes, for optimal execution.

What are fee-on-transfer tokens?

A fee-on-transfer token is a custom or non-standard token that has been designed to charge a tax as a percentage of the overall amount when it is bought or sold. As much as 25% of daily trades on Ethereum mainnet involve a buy or sell tax token, accounting for up to 13% of volume in July, and similar figures are seen on other popular EVM chains.

Many trades on popular DEXs will fail because they are not accurately accounting for buy/sell taxes. This results in executing an amount that doesn’t match the quoted amount, leading to the trade reverting. For users, a further pain point comes from the lack of information. You may not know why a trade failed if you don't know that a token has a buy/sell tax, and even if you know it is there your DEX may be showing outdated information, when the tax is in fact higher than stated. 

Not all tokens with a buy or sell tax act the same, so it can be difficult to tell if a particular token charges a transfer tax. Factors that make it hard to detect include: 

• Not every FoT token's buy or sell tax is a flat percentage fee that gets applied uniformly to every swap transaction. Taxes can dynamically increase or decrease depending on account activity or other factors. 
• Some tokens have the ability to toggle between charging a tax or not, meaning a buy or sell tax may appear or disappear at any time. 
• Token buy and sell tax can vary with time, across wallets, or depend on things like trade direction, liquidity source, and even trade volume.
• Many tokens listed as having no buy or sell tax do actually have fee-on-transfer mechanics but can not be detected under normal conditions due to custom variables; the only way to find out is to make (or simulate) a trade.

While there are platforms that try to detect these taxes, there is no standard to follow so it is difficult for them to give an accurate picture without attempting a trade. And, since taxes can appear or disappear over time, the data they do provide quickly becomes outdated, so they would have to constantly monitor for buy and sell taxes. The best way to check if a token has a buy or sell tax is to simulate a trade in real time by using Matcha. 

What happens to the fees charged by taxed tokens?

Fee-on-transfer tokens can be customized so that the tax incurred on transfer can be used in a variety of ways. Matcha charges zero fees on swaps and never receives fees associated with buy or sell taxes. Some ways in which a fee-on-transfer token may allocate the tax include:

• Send the tax to a treasury for token development.
• Burning the fee to cause deflationary pressure.
• Send the tax to an organization such as a charity. 
• Use the tax to reward other token holders.
• Use the tax mechanic as a honeypot, which can ‘rugpull’ users at any time by sending a majority of tokens to a developer-owned account.

How exactly any particular custom token chooses to allocate their buy or sell tax from fee-on-transfer tokens varies from project to project. It is therefore essential that you thoroughly research any token you plan to buy, as it may lead to unexpected consequences when you later sell.

The risks of custom tokens with a buy or sell tax

While tokens with a transfer tax can lead to many novel and interesting use cases, there is also a risk of so-called honeypots. These are projects that use custom token parameters maliciously. One example would be if a token with no buy or sell tax later activates a large tax to prevent the token from being sold for any meaningful amount, potentially incurring massive losses. Or, tokens may include hidden trigger conditions that make them appear safe until you perform a certain onchain action or a threshold is met.. 

In these cases, you may not realize the token you are buying is malicious until after the fact. Since these tokens are designed to be upgraded at any time, they may be able to reach a large number of users before activating tax mechanics.

Transparent buy and sell taxes on Matcha  

Matcha’s improved support for tokens with a buy or sell tax has reduced the total amount of custom token errors users experience by up to 80%, while providing an unmatched trading experience by accounting for the tax in the quoted amount, unlike most other DEXs and aggregators. This also improves transparency in a way that benefits all Matcha users, since many buy and sell tax tokens were previously not detectable or unsupported.

Matcha continues to lead the way by improving the decentralized trading landscape in the face of growing complexity, and ensuring you always know how much lands in your wallet, no matter what you’re trading. Try Matcha today!