DAO Taxes - What are they?

How do DAOs work?

As mentioned earlier, a DAO structure allows all stakeholders to have input on a cryptocurrency’s protocol. This is not unlike the modern situation with stockholders, in which each stockholder has a vote on what the company does. What does make things different, though, is that there is no Board of Directors in a DAO like there is with a traditional company. The Board of Directors is anyone and everyone who holds the crypto.

For an example of a DAO, we encourage you to take a look at Uniswap. The UNI token is structured so that those who hold it can vote on the future of the token. This includes everything from transaction fees to what (if any) new features will be implemented.

What does this have to do with taxes?

With anything involving finance, the IRS is close behind, keeping tabs on what is owed. Just like with traditional corporations, a DAO cryptocurrency is going to be looked at as a source of tax revenue by the federal government. Any entity which creates profits and divides it amongst its stakeholders will eventually be taxed.

What’s curious is that the IRS has yet to actually give any concrete information on how it plans to tax DAOs. After all, the DAO has no centralized authority. There is no Board of Directors or CEO to turn to and levy taxes again like is expected in a traditional company.

To complicate matters a bit further, what happens when the DAO is based outside of the United States? What if many of its members are split between the inside and outside the US borders? In such a case, maybe the DAO would be taxed as a foreign corporation, but then we return to the issue of no centralized authority.

Considering this, we have a few ideas on how DAOs might be taxed.

DAO Taxes: Pass-Through Entity

Pass-through entities are structures which offer stakeholders a favorable tax rate while protecting them from personal liability. On the federal level, we can compare these entities to sole proprietorships, partnerships, LLCs, and S-Corporations. Owners share the profits of the entity, but their individual income levels determine the amount of taxes they owe.

This is extremely beneficial because it allows stakeholders to avoid double taxation, which is common in traditional corporations. This is when a corporation pays income tax once when it earns income, and a second time when its shareholders are given a share of its profits through dividends. 

The DAO structure allows for a single layer of tax: individual income. No matter the size of the DAO, how much profit it makes, or the amount of people holding onto its token, it will be taxed once.

To learn more about pass-through entities and how you can structure your own business to take advantage of this tax minimization method, set up a free one hour Yoke tax consultation. Our tax pros have over twenty years of experience and are excited to help.

DAO Taxes: Traditional Crypto Taxes

Based on what we currently understand about DAOs, it logically follows that individual token holders will be responsible for their own taxes. Since the IRS has no Board of Directors to target, it will revert its gaze to the individual stakeholder. DAO tokens will, like other cryptocurrencies, be subject to both income tax and capital gains tax.

In most countries which tax crypto, governments consider crypto as property. This is true in the UK, Canada, Australia, and the United States. Because crypto is property first and foremost, it is taxed as such. Much like a stock in a company, crypto can appreciate in value (increase in worth), and the owner may sell or trade it for profit. That profit is then taxed under capital gains tax. The same is true if the property depreciated in value (decreased in worth).

What is capital gains tax?

The IRS sees capital gains in two separate ways: short-term and long-term. Both have an impact on how much you are taxed at the end of the year, so it is important to keep records! For help, consider setting up a free consultation with a Yoke Tax professional.

Short-term capital gains are simply any gains (or losses) made from an asset which is held for less than a year. These gains are taxed under the same income tax bracket which you fall into. Long-term capital gains are a bit different. They focus on gains or losses for assets held for a year or more. Depending on the individual’s income, the amount which you are taxed can be much lower. Because of this, it is important that you buy to hold long term!

The IRS provides a specific guide on capital gain tax rates by income level on its website. Although the language is focused on USD, the laws apply as a crypto tax due to crypto being seen as a comparable property.

Final Thoughts

DAOs are an exciting new structure for cryptocurrencies of all types. Although it may seem technologically complicated, when it comes to taxes, they’re remarkably simple. We know the IRS wants to tax, and so it will tax whomever it can easily identify. In the absence of a centralized authority, the IRS will levy taxes on the token holder. After all, it already knows that you have crypto on hand.

The only thing that’s left to do, as a crypto investor, is to minimize the amount of your crypto earnings that the federal government takes away through taxation. That’s where Yoke Tax comes in. Connect with us and let us handle the numbers for you.