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DAO Legal Issues

Published by
Andrew Warner
February 13, 2023

Is your DAO a legal entity? Are you an employee or contractor? What taxes do you owe if you’re a signatory on the multisig?

Does any of this mean anything to you?

If you’re confused about the tax implications of your work with DAOs, you’re not alone.

To help us all remain compliant, I talked with Charles Kolstad, a partner at the international law firm, Withers Bergman, and Head of the Global Cryptocurrency Practice Group. Charles has over 43 years of experience with tax law and helps both DAOs and individuals navigate this space.

“There are two sides to the coin when it comes to DAOs – the company side, and the individual side,” said Charles.

Here are the key things to consider when doing your taxes for your DAO work.

Important note:

This blog post is NOT legal advice. Always consult your attorney and accountant before making any decisions about your taxes or compliance.

You can find a DAO lawyer in our directory, or contact Charles Kolstad directly.

Tax Implications for DAOs

From the DAO side, taxes must be withheld and reported to the IRS, and all employees must be registered with the IRS and the state. This means the DAO must apply for an employee ID number (EIN) and a state tax ID number.

Then the DAO must decide whether contributors are employees or independent contractors.

“If they're an employee, then [DAOs] have to withhold federal income tax, state income tax (if applicable), FICA (federal payroll tax), FUTA (federal unemployment tax), social security taxes, all of that,” said Charles.

When paying independent contractors, the DAO needs to receive a Form W-9 from the contributor and report any payments over $600.

Whether you have employees or contractors, there are serious consequences for not paying taxes for your employees or contractors. “Payroll taxes are the largest tax collection source the federal government has,” said Charles, “so they're very, very focused on making sure you’ve collected their taxes.”

Tax Implications for Individuals

For individuals, it’s critical to know whether you will be treated as an employee or an independent contractor. If you are an independent contractor, then you are required to submit a W-9 form and pay self-employment tax. If you earned more than $600, you should receive a Form 1099 from the DAO in January of the following year.

And be prepared for a steep tax bill.

“If you're an independent contractor, you're effectively paying both your share… as well as the company's share,” said Charles. “So there's a sort of doubling up of the economic burden if you're an independent contractor.”

Despite a potentially high tax bill, Charles urges individuals to report any crypto income, as there are significant penalties for failure to do so. Not reporting your income could also have long-term implications, such as reducing your Social Security benefits and unemployment benefits.

Joining a DAO

When it comes to joining a DAO, Charles recommends asking what the legal entity is first.

If it is an LLC, the individual will have some protection as long as they are not part of the multisig wallet team. However, if the DAO is not an LLC, then all core contributors could be held liable for outstanding tax obligations.

“If it isn't a legal entity, then in addition to the people who are the signers on the wallet, anyone part of the core team—anyone making decisions as to who to pay and who not to pay— are potentially liable,” said Charles.

Charles also said not to assume that crypto, blockchain, and multisig wallets are anonymous.

“That’s just a complete myth,” said Charles. “The IRS, Department of Justice, and FinCEN (Financial Crimes Enforcement Network) all have computer science people. They all have blockchain analytics and software tools. They'll find you and they'll find you faster than you think.”

The bottom line: make sure to report any crypto activities and comply with the tax laws. Consult an attorney and accountant to be sure you remain compliant.

“The IRS may be slow, but they’re not stupid,” said Charles.

Doing decentralized work in a centralized world comes with hoops and obligations that most of us would rather avoid. But it’s more important than ever to pay attention to your tax obligations.

If DAOs are to have a future, we all must pay our fair share.

Need legal help? You can find a DAO lawyer in our directory, or contact Charles Kolstad directly.

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