DAOs tax consideration and legal implications

DAOs or decentralized autonomous organizations are managed by a computer program powered by the potential blockchain technology. These organizations are run by a group of individuals who collectively vote to decide on organizational proposals. Each of the DAO token holders have an equal right to vote. These innovative organizations could take any decision or operate without the need for a board of directors or other governing bodies. Such projects can potentially offer an effective and potentially secure platform to gather individuals and resources to achieve a collective goal.

Are DAOs considered as an entity for tax purposes?

If we understand the concept of DAOs, it seems like a cyber creation without any formal character. Notably, the organizations can still be an entity for tax purposes in the United States or any other nations globally.

– Advertisement –

According to the taxation policies of the US, a joint venture or other contractual arrangement may create a separate entity if the participants carry on a trade business, financial operation, or venture and divide the gains therefrom.

Now, these governing bodies are created by investors who intend to vote and opt for investment proposals, contribute funds for investment, and share profits. So, these organizations may be considered as a separate tax entity.

Legal liabilities

Taxations are no purpose of concern greater than legal liabilities. Indeed, legal liability would result from their investments in DAOs. in the United States, a couple of states Vermont and Wyoming have allowed these autonomous bodies to register in their states as DAO LLCs which will be like regular ones and offer the benefit of limited liability.

Viewed from this perspective, we can say that as the organizations will be registered under state law, it would be treated as a domestic partnership for tax purposes.

Any exchange is legally taxable

According to the Internal Revenue Service (IRS) of the United States any token exchanged for another at a gain or loss is subject to tax. However, contributions of property to a partnership or corporation in exchange for partnership interest or corporate stock. And via such view, the transactions might be tax-free.

Depending on the token properties and DAO classification it might be possible to argue that a US residence recognizes no gains or loss from the contribution of Ethereum to a DAO in exchange for a similar token.