Friday, July 29, 2022
Samuel D. Brunson (Loyola-Chicago; Google Scholar), Decentralized Autonomous Organizations and Futureproofed Tax Status:
In the last half decade, digital autonomous organizations have exploded. Where there was no such thing prior to 2016, there are now at least 4,000. There is some debate over what type of legal entity, if any, a DAO is. But, thanks to the check-the-box election, developed in response to LLCs, there is no question about the entity status of DAOs. They default as partnerships.
Figuring out the default tax status of DAOs does not end the entity issue, though. Partnership taxation comes with certain obligations, obligations that at times run counter to the ethos of crypto investment. For instance, the anonymity that crypto promises is incompatible with partnerships' tax obligation to collect information about their partners.
While the check-the-box regulations have made it possible for DAOs to flourish without facing the tax uncertainty that LLCs experience for the first two decades of their existence, DAO founders need to understand the tax rules associated with partnerships and design their DAOs in a way that allows them to comply with their tax obligations. This article reviews the development of the check-the-box rules, the development of both LLCs and DAOs, and some of the tax obstacles that DAOs will encounter and must prepare for.