A DAO (Decentralized Autonomous Organization) is an organization that exists on the blockchain, governed by rules coded as a computer program, without a central authority. Community members vote on decisions, such as spending treasury funds, and shaping the organization’s direction, all in a trust-less manner through code on the blockchain. Ownership rights are presented in a token or an NFT. This new organization paradigm presents many questions which will be addressed below.
Is a DAO a legal entity? Yes, in fact, the state of Wyoming recognizes DAO as a limited liability company. Wyoming Senate Bill 38, titled Decentralized Autonomous Organizations Supplement, gives Wyoming DAOs protected legal status and allows them to incorporate as limited liability companies under Wyoming’s Limited Liability Act. The legislature passed the bill in July 2021. This legal status ensures members are personally protected from lawsuits.
The IRS has not published any guidance on DAO taxation. Some professionals have deduced it should be taxed as a regular partnership, where members are coming together for profit. This would mean that individuals would be taxed on DAO income, as pass-through income, regardless if they received any money. Additionally, if a member trades a governance token, then they would need to keep track of how many days they owned the token, to determine their proportional share of income.
What about tokens that are deposited into decentralized exchanges for trading liquidity, which temporarily have lost voting and revenue-sharing rights? Some DAO tokens need to be staked (deposited for a length of time) in order to participate in voting and revenue sharing. In this scenario it’s possible, unstacked tokens have no tax liability attached to them. There are many questions that need answering, and our existing partnership tax law does not capture this new organizational paradigm. It’s expected that over time the laws will be amended to incorporate these types of entities and publish clear guidance.
There are many valuable and popular DAO’s already in existence. Here are two notable DAO’s from the Decentralized Finance ecosystem.
Maker, a DAO with governance token MKR, is a company that mints overcollateralized stablecoins. Currently, it has a market cap of 646 million and controls a treasury worth 5.3 billion.
Uniswap, a DAO with governance token UNI, is a decentralized exchange for trading tokens and NFT. Currently, it has a market cap of 6.1 billion, with 3.5 billion of liquidity, and in the last 7 days facilitated 4.9 billion in trading volume. Both of these organizations operate efficiently through code, by team members spread across the globe.
What are some industries or companies that you think this new organizational structure can improve? — a sat for your thoughts.