What is a transfer-tax token

2021 has been the year of the transfer-tax token. But what is a transfer-tax token and what risk for investors come with it?

A transfer-tax token is a unique type of ERC20 token that imposes a fee on each transaction. This fee, usually a small percentage, is deducted automatically whenever the token is transferred between all form of addresses, including AMM pairs.

Incentivizes Holding: The transaction fee discourages frequent trading and encourages long-term holding.

Redistribution: Some tokens redistribute a part of the transaction fee to existing holders, rewarding them simply for holding the tokens. This can be automatically incorporated in the token, making it a reflection token or simply done manually by creating staking contracts which uses the tax as reward.

Auto Liquidity: Some of these tokens automatically add a portion of transaction fees to liquidity pools, enhancing overall liquidity and stability.

Deflationary Mechanisms: They can also include features like token burning, gradually reducing the total supply to increase scarcity.

A Tool for Grifters?

These tokens can be exploited by creators who may disproportionately benefit from high transfer fees.

Grifters might fill their bags by setting high fees, which they partly receive, especially in tokens where a portion of the fee goes to a specific wallet or group of holders.

Risks to Be Aware Of:

The most significant risk involves the creators increasing the transaction fee to an exorbitant level (e.g., 100%), effectively trapping holders' funds in the token - turning the contract into a honeypot scam.

This is a standard ERC20 implementation with a transfer-tax, settable to > 100%. The tax is automatically sent to the owner's wallet: