How are DAOs taxed?
The term DAO stands for ‘Decentralized Autonomous Organization’. Unlike traditional organizations, a DAO’s principles and decisions are not determined by a centralized authority, but instead through smart contract and tokenomics.
In a DAO, members hold governance tokens (either in the form of a specific coin, or an NFT from a specific collection). These members are then able to either create or vote on proposals put forward to the DAO.
DAOs function trustlessly via the implementation of smart contracts. Contracts relevant to a specific DAO define the rules of the organization, and in most cases hold the DAO’s treasury. Depending on how the smart contract in question is coded, nothing outside of its rules and logic will work. As an example, if someone tries to access the DAO’s treasury in a way that is not programmatically agreed to in the smart contract, their attempt will fail.
This is possible because smart contracts are tamper-proof once they go live. You can't just edit the code (aka the DAO’s rules and logic), unless a consensus is reached by the collective group.
Right now, there are no clear guidelines in Australia, the US, the UK or Canada as to how DAOs should be treated from a tax perspective.
The only potential example we currently have on the tax treatment of DAOs in the US occurred in 2017, when the SEC ruled that The Dao’s governance tokens were offered by a “virtual organization”, and were therefore subject to securities law.
Due to this lack of clarity, we recommend talking to a local tax professional to determine how best to treat entity-level profits of DAOs.
In some DAOs, members are paid in tokens in return for providing goods or services. In most regions they haven’t yet made specific rules on how DAO payments should be taxed, but have usually determined that being paid in crypto will be viewed as ordinary income. You could hypothetically apply the same determination of your tax regions treatment of being paid in crypto to DAO payments.
In Australia, there is not yet specific guidance on how DAO payments will be taxed, but there is direction on how earning crypto from providing a good or service is. According to the ATO, this type of payment will be treated as ordinary income.
In the US, the IRS has stated that any wages or salary earned in crypto will be treated as ordinary income.
In the UK, the HMRC recently clarified that staking rewards (i.e. rewards that are paid in return for providing a service to a particular protocol) will be treated as ordinary income. However, they too haven’t yet clarified how payments from DAOs will be treated.
In any instances where you are unsure how payments received from a DAO will be treated in your jurisdiction, we recommend working with a local tax professional to determine what is the best way forward for your personal circumstances.
Once again, there is no specific guidance in major tax jurisdictions as to whether governance tokens are treated differently for tax purposes from general crypto assets. Until a time at which specific guidance is provided, it is safe to assume that they will have the same treatment as other crypto assets.
In some DAOs, you receive governance tokens as part of their launch, or as an incentive or reward for participation. This could be seen as akin to an airdrop.
In Australia, the ATO states that the money value of an established token received through an airdrop will be taxed as ordinary income of the recipient at the time it is derived.
In the US, any airdrop into your wallet will likely be taxed as ordinary income. The value of the cryptocurrency used is the fair market value of the token at the date and time you become the beneficial owner.
In the UK, the HMRC considers airdrops as taxable income if you did something to “earn” the reward.
Once again, if there is any doubt as to how governance tokens are taxed in your jurisdiction, we recommend working with a local tax professional to determine what is the best way forward for your personal circumstances.
While there is not any specific tax guidance on the treatment of DAOs, the Crypto Tax Calculator platform can still help make your compliance life easier. In the app, you have the ability to categorize transactions depending on the approach you choose to take. For example, if you received a payment from a DAO and would like to classify it as ‘income’, you can do so with a simple categorization selection. An added bonus is that for any future capital gains tax events involving those particular assets, the cost basis will be tracked by our algorithm.
Try us out today: https://cryptotaxcalculator.io/
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The information in this guide represents the opinions of experienced crypto tax professionals; however, some of the topics in this guide are still subject to debate amongst professionals, and tax authorities could ultimately release guidance that conflicts with the information in this guide. The information contained in this guide is based on the authors’ interpretation of current guidelines. Changes to the guidelines may be retroactive and could significantly alter the views expressed herein. Therefore, use this information at your own risk and for information purposes only.
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