Token tax
In short A token tax is a fee coded into a token's contract that takes a percentage of each buy, sell, or transfer and sends it to a set wallet or mechanism.
A token tax, also called a transfer fee, is a percentage that the token contract skims off trades. A token with a 5% buy tax and 5% sell tax delivers 95% of what you swapped for, and takes 5% of what you sell. The cut goes wherever the code says: a marketing wallet, the liquidity pool, holders through reflections, or a burn address.
On EVM chains, the contract checks whether a transfer is going to or from the DEX pool and applies the matching rate. Because the swap output is smaller than the DEX quote, you must set slippage above the tax or the trade fails. On Solana, the Token-2022 standard offers a transfer fee extension that works in a similar way at the token program level.
For holders, taxes are a direct cost that adds up with every trade, so a 10% round trip means the price must rise more than 10% just to break even. The bigger danger is adjustable taxes. If the owner can call a function to change the rate, they can raise the sell tax to 50% or 99%, which turns the token into a practical honeypot where selling returns almost nothing.
Read the contract or use a token scanner to see the current buy and sell rates, whether they can be changed, and if there is a hard cap in the code. Check who receives the tax and whether ownership is renounced. Some contracts exempt certain wallets from fees, often the team's. A tiny test sell shows the real sell tax before you commit more.