DAO Taxes 101 - What They Are and What You Need To Know
March 21, 2023
Decentralized autonomous organizations (DAOs) come with a unique set of tax implications. To help DAO members and creators navigate these issues, I talked to Matt Graham, a tax consultant and blockchain innovation lead at Moss Adams about DAO taxes.
This article will
show you how to handle taxes for token purchases,
explain how to calculate taxes for earnings from your contributions to DAOs,
explain the sales tax implications of NFTs and other digital goods, and
1. How gains and losses from purchases affect DAO taxes
Investors in DAO tokens generally calculate gains and losses similar to how they'd handle traditional investments. If you buy a token for $1,000 and sell it for $2,000, you have a $1,000 gain to account for on your taxes.
The big difference with crypto is that token prices need to be converted to their US dollar values at the time of purchase and again at the time of sale.
One big advantage that crypto currently has over traditional investments is that wash sale rules don't apply to crypto. A wash sale is a transaction in which an individual sells or trades a security at a loss and within a 61-day period (30 days before or after the sale), buys a substantially identical security. The purpose of this practice is to trigger a loss for tax purposes while still maintaining a position in the security. In general, tax law would prevent taxpayers from claiming losses on wash sales but the definition of the types of assets the wash sale rules apply to does not currently include cryptocurrency or tokens.
This means that investors in crypto can, for example, sell a token that has lost value, and immediately buy that token back, but still use the loss to reduce a gain on an investment that earned capital gains.
Matt and others expect that Congress will change that rule, but for now, it’s still an available option for DAO investors.
2. Earnings from contributions
Just like at traditional organizations, participants in DAOs can be considered employees or independent contractors. One of the major differences has to do with the level of control over your work. If the DAO has a lot of control over how and when you do your work, you may be considered an employee. If you have control over how and when you complete your tasks, you're more likely to be considered an independent contractor.
As the employee, the company that employs you withholds income tax, Social Security, and Medicare from wages paid. As an independent contractor, the company does not withhold taxes. (For details, the IRS has this well-written explainer on the difference between contractors and employees).
A big difference between earnings from DAOs vs traditional companies is that earnings paid in tokens can experience price fluctuation. If you receive tokens as payment for your work in a DAO, your income is based on the US dollar value of those tokens at the time you receive them.
If you receive a token worth $10 when you earned it and its price at tax time is $3, you’re responsible for paying taxes on the $10 it was worth when you earned it. Some taxpayers choose to liquidate a portion of their DAO tokens at the time they are earned to be able to pay for taxes and hedge against the risk the tokens will decrease in value below the amount of tax due.
If the value of the tokens increases when you sell them, you will need to pay capital gains tax on that increase. If the value decreases, you may be able to use that loss to offset other capital gains. Keep careful records of the value of the tokens when you receive and sell them to make tax calculations easier. (We have
3. Taxes on digital assets
It’s not discussed much, but Matt believes that many states’ sales tax policies could apply to digital goods like NFTs, even if the tax authorities don’t explicitly say it. He also thinks that, in the future, some states could explain that their taxes apply to digital goods and expect back pay of sales tax that applies to past sales.
Washington State has taken the lead on this. On July 1, 2022, Washington published a statement regarding the taxability of non-fungible tokens. Its announcement explained that retailers and other sellers must charge state and local retail sales tax which can be upwards of 10% in some cities within the state. Additionally, taxpayers may be liable for Washington business & occupations tax, a 0.471% gross receipts tax on the vendor.
If you’re not collecting sales tax on digital goods, Matt believes it’s worth planning for.
4. Tools to make crypto taxes easier
There is a variety of tools and services that can help simplify tax accounting, including:
Toku - (Previously WorkDAO) A globally compliant token payroll solution. It's meant for organizations, but individuals who mention they heard about WorkDAO from Origami can join independently.
Opolis - A coop that enables individuals to form an employment entity for free, receive a W2, and automate their taxes
ZenLedger - Software that allows users to easily import crypto transactions, calculate gains and income, and prepare tax returns
CoinTracker - Software that syncs with wallets and generates tax forms
Ledgible - Crypto Tax and Accounting platform that provides tools for institutions, tax pros, and enterprises to monitor, report, and handle crypto
Bitwave - A full back-office software solution for businesses using crypto, holding tokens, and more
TaxBit - Tax and accounting solutions for enterprise and government leaders
DAO Taxes: What to do next
If you have questions about setting up your DAO in a tax and legal complaint way, contact Origami: contact@joinOrigami.com