Wondering how the IRS taxes DAOs?
In the past few years, many crypto projects have adopted the DAO structure. However, many investors simply have no idea how to report taxes on their DAO tokens.
In this guide, we’ll break down everything we currently know about how DAOs are taxed (and what taxable events individual investors need to watch out for).
DAO stands for Decentralized Autonomous Organization. It’s an organizational structure that allows stakeholders to make governing decisions over a protocol without the need for any kind of centralized authority.
Instead of a small Board of Directors making decisions about the company, DAOs enable the community of tokenholders to vote on the future of the protocol.
One prominent example of a DAO is Uniswap. Holders of the UNI token can vote on issues such as how transaction fees are used and what new features the protocol can add for users.
For individual tokenholders, it’s reasonable to assume that DAO tokens will be taxed similar to other cryptocurrencies. That means they’ll likely be subject to both income and capital gains tax.
If you received your DAO tokens through an airdrop, you will again need to report your earnings as income based on its fair market value at the time when it was received.
If you sell your DAO tokens, you will incur a capital gain or a capital loss depending on how the price of your assets fluctuates since you originally received them.
DAOs may distribute rewards to tokenholders. In this case, your earnings should again be reported as personal income based on its fair market value at the time it was received.
Just like traditional corporations, DAOs will likely be subject to taxation. Tax experts have stated that any entity that has a group of different participants working together and dividing profits can be taxed.
However, the IRS has so far released no clear guidance on exactly how DAOs will be taxed. This raises questions. Since DAOs do not have a centralized authority, they cannot file taxes the same way traditional corporations can.
It is also unclear whether DAOs will be taxed as a foreign corporation if one or more of its members is based outside of the United States.
Some speculate that DAOs may be taxed as a pass-through entity. That means that while the DAO itself won’t be taxed, individual members will pay income taxes on their share of the organization’s profits.
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