DAO – an overview

Tax law, practice and jurisprudence are struggling to keep up with the rapidly evolving space of digital technology. Web 3.0, crypto, NFTs and blockchain technologies have highlighted issues in all areas of legal practice, and there are many and varied points of view on how each should be addressed. There is very little harmonisation when it comes to these technologies. The recent EU-wide Regulation on markets in crypto-assets ('MICA') is one of the few examples of international instruments on the legal treatment and regulation of these cutting-edge technologies. In the tax law field there are the EU-wide tax transparency rules for crypto assets ('DAC 8') and on the international level there is the Crypto-Asset Reporting Framework being developed the OECD.

Decentralised Autonomous Organisation, or 'DAO', is an existing technological concept that has gained traction in recent years. It is a general term that refers to how certain blockchains and projects operate.

As the name suggests, DAOs operate on a decentralised basis. DAOs are run and governed by their members, and there is usually no equivalent to a company's CEO making the core decisions for the organisation. A DAO's community can vote collectively on a wide range of issues, such as which protocol changes to make, how to allocate the project's resources, who to hire, and when to pay distributions to DAO members. The governance policies and rules of each DAO vary widely, and some are more democratic and inclusive than others.

Examples of notable DAO projects are:

  • Uniswap (UNI token) - a decentralised crypto exchange with a daily trading volume of around €2 billion.
  • DAO Maker (DAO token) - a platform where participants can fund new crypto projects. DAO Maker members vote on which projects should be funded.
  • Internet Computer (ICP token) – decentralised cloud computing project.

DAOs are flexible. There is usually a core code that defines the terms of participation and this code is the rulebook by which the organisation abides. These rules dictate which token holders can participate, whether they need to deposit their tokens or have a certain number of them, and whether any other conditions must be met to exercise voting rights. These rules are usually implemented by smart contracts. Depending on how the DAO was designed, the core governance rules themselves may be changed through a public vote.

Below is an example of some of the possible scenarios that a DAO and its members may encounter and what tax issues could appear:

Scenario

Tax Concerns

DAO members vote to release some of their commonly staked funds back into their accounts together with a bonus payment

May raise personal income tax issues and whether the bonus payments should be considered as interest or dividends in the jurisdiction of tax residence of the member.

Could also raise withholding tax issues in the jurisdiction from which the payment is legally deemed to have been made. The question of where the outbound payment is made would in itself be a separate issue to consider, particularly if the DAO in question is not incorporated.

DAO members could vote to burn some of their staked tokens, thereby increasing the value of the existing tokens.

Could cause issues with taxation of unrealised capital gains in some jurisdictions.

Some jurisdictions, such as Malta, also tax deemed transfers of value where there is a change in the value of the shareholding (assuming the DAO token in question would be considered a 'security').

DAO members could vote to incorporate a company and operate it through nominees, putting company decisions to a vote on the blockchain.

May cause issues with tax residence and the location of the place of effective management and control of the company from international tax law point of view if the DAO members act as directors of the said company.

A DAO member decides to give up his right to participation in exchange for payment.

Could raise capital gain issues in the jurisdiction of the tax residence of the DAO member.


The legal treatment of DAOs is complicated and to date, there are few jurisdictions that recognise DAOs, the US state of Wyoming being one of the very few where DAOs can be incorporated as limited liability companies called 'Wyoming DAO LLC'. Recently, the states of Tennessee and Vermont also introduced DAO legislations with 'Blockchain-based Limited Liability Companies'. In most jurisdictions, the creation of a DAO alone not sufficient for a legal recognition, and the DAO must interact with the traditional legal system in order to have a legal standing. However, this should not be seen as a negative situation, as old legal instruments can adapt to new social and economic realities. In the next article, we will discuss how Maltese foundations can provide a flexible solution for the legal recognition and operation of a DAO.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.