Tax & Crypto — what you need to know when it comes to taxes and fees
Many who start with buying a token have not spent enough time to look at the mechanics and rules when it comes to when to pay what tax. Or are surprised when high fees are asked.
When you buy a Crypto Token especially on a smart chain like the Binance Smart Chain (BSC) there is a price to pay for
- the Token itself (based on the market price)
- the tax of the Token (first of all a buy tax, when you sell a sell tax)
- fee for using an exchange
- and the gas fee for the Network
Some common questions:
- Can I avoid paying a tax?
- Why is the network fee so high?
- How am I supposed to know if there is a tax applied?
- How high is the tax?
- How much do I need to pay for fees?
- Isn’t it always the same tax / fee?
By the end of this text you will be able to answer these questions and understand why Tokens work with taxes as well.
I will not explain what a Token is. There are many and very different ones available on the BSC network alone. So lets look at this a bit generic and start with the first question most people have:
Do I have to pay taxes when buying or selling a Crypto Token?
Yes, in some cases there is a tax to pay, in others not.
Some Tokens are actually tax free and you can buy and sell them without any taxation. Others have differing buy and sell taxes. Even flexibility in setting or adjusting the tax is possible. So best to check the current tax prior to the transaction.
Important:
Even a transfer from wallet to wallet can be taxed!
It may already be an important piece in evaluating the Token in terms of how the tax is spent (burn, re-buy, reflections, liquidity,…).
But it is even more important to check if a high tax when selling reduces profits (most times an indicator that long term holders shall be attracted not traders).
And it influences the amount you get — very annoying if you want to get an NFT or enter a Staking with minimum requirement etc.
Recommendation:
Only buy a token you understand the (current) buy and sell tax structure!
Why? Well it depends on the specific Token and how the current tax structure is set. There is some thoughts behind this as most people do not like to pay tax but almost everyone is looking for benefits.
So: Where do I look for details and find info on the current tax rates?
Usually this information is filed close to the “Tokenomics” and sometimes is called “Transaction Fee” or more differentiated “buy fee” and “sell fee”.
Example: https://docs.mvc.finance/tokenomics
So when you Do Your Own Research (DYOR) make sure you look for these words. Good places for this are:
- Webpage,
- Documentation,
- Communication Channels like Telegram, Discord etc
If in doubt, reach out and ask. Sometimes there are even commands like “/tax” or “/tokenomics” available in the Telegram groups so common is it to ask for this.
Paying the tax is not enough — Fees for exchange and processing on the blockchain apply, too!
Now you know where to check or ask and also know that for example 10% buy tax applies and will be used to sent reflections (additional tokens for free) to existing holders based on their share of the total amount of the Token.
When it comes to looking at the cost involved to get a Token this is only the first layer of.
The next layers are the fees for
- using an exchange to make the purchase
- the network fees or gas fees that no one can avoid
The fee an exchange like Pancake Swap is keeping from every transaction is quite minimal. There may be differences depending on transaction so mabe you want to briefly check if your token is available somewhere else — there might even be a different price.
But in reality:
Do not care (to much) about the fee of an exchange.
Especially non standard coins or “alt coins” are mostly not even available in more than one exchange anyways.
Last but not least the network fee surprises and confuses many at least in the beginning. Why? Well…
- Network fee is displayed by default in the toeken of the network (BNB on the Binance Smart Chain)
- Depending on transaction and wallet there is no fiat equivalent shown
Also it is a max value depending on several parameters like
- Load on the network
- Priority chosen by the user (usually there is the option for low, medium, high value in the settings or to be selected for the transaction)
- Complexity of the underlying process (complex staking in a vault or just enabling a contract)
Recommendation:
Especially on networks with high fees like Ethereum try to do transactions that are not time critical at a time when “the gas is cheap”.
There are web pages for this or some wallets give an indicator. For sure be alarmed if there is something like a 500$ fee for the network popping up (yes, that can happen and no, I did luckily not click automatically to execute the transaction).
Also you can check on pages like https://bscscan.com or https://etherscan.io (or the repsective equivalent depending on the network) what the actual gas price / transaction fee was like.
This will also provide insight into the complexity of the transaction.
Just to clarify this:
This is not about government tax or any kind of tax advise that is meant forl filing a tax report with the IRS or any similar institution.
Leave comments if something is missing or needs further explanation.
