What’s token burning? How it works and why it matters

In recent years, several major crypto projects like Binance Coin and Avalanche have permanently removed millions of tokens (BNB and AVAX, respectively) from circulation through structured burn programs and protocol-level fee burns. Like scheduled wildfires, these token elimination systems are designed to improve the ecosystem long-term.

Token burning is what permanently removes tokens from circulation. Some projects use it as a deflationary measure to support supply discipline, strengthen confidence in the token’s economics, and reward long-term holders as circulating supply declines. But burn mechanisms work differently across crypto ecosystems, and reducing supply on its own doesn’t guarantee price appreciation.

In this article, we’ll walk through what it means to burn crypto and how it affects supply and investors.

What’s token burning?

Token burning is the process of permanently removing crypto tokens from circulation by sending them to an address that can’t be accessed or controlled. On most blockchains, this is a verifiable on-chain action. The burn transaction appears in the ledger with the amount destroyed, the wallet that initiated the burn, and the destination address, which is typically a known burn address (such as 0x0dEaD [shorthand] on Ethereum). Because there’s no private key for that address, the cryptocurrency can’t be moved again, and it’s considered removed from the active supply.

Projects apply token burning across different asset types, including ERC-20 tokens, native assets, and DeFi protocol tokens. The burn mechanism differs depending on how the asset is implemented in the blockchain. In most ecosystems, you can burn tokens only if the protocol or smart contract includes a burn function or allows transfers to an unrecoverable address.

How does token burning work?

There are several different mechanisms that burn tokens, depending on how a project structures its tokenomics and smart contracts.

Automatic burns

Automatic burns happen when the burn logic is embedded in the token’s code. The token’s smart contract triggers burning based on predefined conditions. For example, a portion of each transaction fee may burn automatically, or a percentage of all tokens transferred between wallets may be destroyed.

Manual burns

In manual crypto burns, a project team or treasury manager sends a specific amount of tokens to a burner address like a normal transaction. In many cases, this happens after a major token sale or distribution event. Teams may burn unsold tokens, portions of team allocations, or supply segments that were previously reserved and shouldn’t go into the public pool. Manual burns are less transparent than other kinds and typically require that users trust the team will execute them as communicated.

Fee-burn models

Fee-burn models are common in more mature crypto ecosystems. In these designs, part of the network or protocol fees are removed from circulation. On some networks, like Ethereum after its EIP-1559 update, part of a base fee paid by users is burned instead of being fully distributed to validators or miners. This keeps trading fees lower and more predictable for traders as well as slowly lowering the amount of tokens in play.

In DeFi protocols, a share of trading fees, lending interest, or protocol revenue may be burned according to a set formula. These burns are often tied to activity levels, which means the volume discarded increases as usage grows.

Buy-and-burn programs

Buy-and-burn programs involve a crypto team purchasing their tokens from the open market and burning them afterward. The project or protocol uses their revenue, fees, or profits to buy tokens and permanently remove them. This model is sometimes compared to stock buybacks in traditional finance because it immediately reduces the available supply on secondary markets. The final effect depends on trading volume, liquidity, and if demand follows the same trajectory as supply reduction.

Proof-of-burn

In proof-of-burn strategies, users burn tokens to gain access to another resource or right, such as mining privileges, validator participation, or minting a new chain. Burning acts as a commitment signal, much like staking in proof-of-stake (PoS) systems: The user sacrifices their current tokens to access a future opportunity or influence on the network. Burning in this model has a more functional role in the protocol rather than only serving as a supply adjustment.

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Why do crypto projects burn tokens?

Projects turn to token burning for dozens of economic and strategic reasons. Here are a few of the most common ones.

Supply reduction and scarcity effect

Some projects burn tokens to gradually reduce circulating supply and create scarcity dynamics that may benefit holders if demand remains stable. BNB is a clear example of this approach: Its tokenomics include a long-term plan to decrease the original 200 million supply to 100 million through recurring burns. Its auto-burn and BEP-95 mechanisms have already destroyed more than 60 million BNB, bringing the supply to about 137.7 million tokens in late 2025.

Signaling commitment or alignment

Burning tokens from project reserves can serve as a commitment signal to the community. When a project destroys part of its own allocation, it reduces the potential supply that insiders could sell later. The Stellar Development Foundation applied this in 2019 when it burned a significant portion (around 55 billion) of its XLM currency reserves held in foundation wallets, framing the move as a shift toward a leaner, more focused supply structure. This shows traders that project teams are committed to growing their tokens’ value without focusing exclusively on their personal gain.

Offsetting issuance and moderating inflation

In crypto systems with staking rewards, miner and validator payouts, or ongoing emissions, burning tokens can offset part of the new supply entering circulation to avoid inflation. Ethereum’s EIP-1559 mechanism illustrates this: The burned ETH tokens offset a portion of newly issued crypto, limiting net supply growth.

Participation, utility, and user-driven actions

In some ecosystems, burns may be initiated by a community or treasury to reflect collective decisions or ecosystem goals. One example of this in practice is the Shiba Inu (SHIB) system, where tokens are periodically sent from project and community wallets to a public dead address, and the cumulative burned supply is visible on the chain.

In other environments, especially non-fungible tokens (NFTs) and crypto gaming (GameFi), users burn tokens or existing digital assets to mint upgraded items or unlock additional features. This turns a token burn into a functional part of a system’s regular operations.

Does token burning affect price?

While burning reduces the number of tokens in circulation, cryptocurrency price still depends on factors like demand, liquidity, and the network or protocol’s activity. A burn can support price increases only when it reflects real economic shifts or utility.

In some crypto ecosystems, burns correlated with stronger price performance because they were tied to genuine usage. On Avalanche, for example, all AVAX used for transaction fees is burned, so higher network activity leads to higher burn volume that directly reflects the health and popularity of the network. This volume can positively influence investor sentiment and, with that, AVAX’s price.

In other cases, large community or treasury burns have had little impact on price because currency demand didn’t follow. The Terra Classic (LUNC) burn campaigns destroyed a significant number of tokens, but the effect on price was mostly temporary because the underlying ecosystem didn’t affect meaningful activity.

Is token burning taxable?

In the United States, the tax impact of token burning depends on who initiates the burn and how it happens.

If you burn your own tokens, the IRS may treat it as a disposal event. Destroying tokens with a cost basis and measurable fair market value (FMV) at the time of the burn can result in capital gain or loss even though you didn’t receive cash in return. It’s similar to the tax principle applied to regular token swaps.

If tokens are burned from rewards, fees, or income that you would otherwise receive, the value may still be considered taxable income first. The burn then changes the basis or reportable proceeds. 

Fee-burn models can also affect tax calculations in another way. When part of a transaction fee is burned, it may reduce the effective proceeds of a trade or adjust your acquisition cost, which matters for taxable gain and loss reporting.

To file your taxes accurately, keep detailed records for any crypto burn. This includes:

• The burn transaction hash
• The token’s fair market value at the time of the burn
• Their original cost basis

Risks and misconceptions

Token burning is often marketed as a positive move for crypto holders, but it also carries risks you should be aware of. Results can vary based on how the burn mechanism interacts with trader habits and the market at large.

Here are a few of the biggest downsides of token burning:

• Burns don’t guarantee price increases: Supply can shrink, but price still depends on demand, liquidity, and real network activity.
• Narrative-driven burns can be misleading: Headline burn announcements may sound significant, but they don’t always lead to drops in numbers – new tokens may enter circulation through rewards or emissions at similar or higher levels.
• High burn rate doesn’t always mean deflation: It’s important to understand what burn rate in crypto really shows, as a protocol may burn fees while still issuing large rewards. This results in net supply growth despite visible burns.
• Smart contract burns are irreversible: Tokens sent to a burn address can’t be recovered, so operational errors can have serious ramifications. 
• Burns can trigger tax consequences: In some cases, burning your own tokens may create a taxable gain or loss even though you aren’t earning anything in return.

Stay on top of token burns and tax reporting with CoinTracker

Token burning can change how a cryptocurrency’s supply and value evolve, but its impact depends on real user demand. For holders, it’s especially important to understand how burning can create price swings, when they may create tax implications, and how those events show up in your tax portfolio records over time. CoinTracker can help you stay on top of tax reports by syncing with hundreds of digital wallets and exchanges for real-time updates on your crypto holdings.

Worried about reporting your crypto taxes? CoinTracker makes it simple. Join over three million users who trust us for hassle-free tax reporting. Start for free today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.