Should DAOs pay taxes? And, if so: Where?
There’s a conversation underway in MakerDAO about how it should relate to the governments of the world, which has implications for the whole DeFi industry. In short, people are talking about whether or not MakerDAO should find a way to pay its taxes.
“I don’t think anyone here has the money to pay the IRS if they decide that Maker is a U.S. entity and decide to treat as income the $400+ million batch of tokens provided by the Foundation,” pseudonymous MakerDAO forum user PaperImperium wrote.
“My understanding is the only way around this is simply that Maker itself meet any claimed obligations,” the user continued. ”The first level of compliance is paying taxes — preferably in a single jurisdiction we choose now and not half a dozen that decide they can pick on a stateless DAO.”
Analog World Law
Dating back to around 2014, MakerDAO is thought to be the oldest project in decentralized finance (DeFi), with roots in the BitShares blockchain. Most people know it now as the engine that creates the decentralized stablecoin DAI. It functioned as a decentralized autonomous organization (DAO) — an organization that mediates all its decisions over the internet and a blockchain — before that was even really a concept.
Eventually it created the MakerDAO Foundation in order to interact with the non-blockchain world, but this summer it wound the foundation down and returned to something more like its original state, an organization that dwells on the Ethereum blockchain rather than the books of any government.
This posture toward analog world law is a big conversation in the organization. The crypto universe has always been strongly tinged with a libertarian mindset and its early adopters have taken joy in eluding state supervision, but the bigger it becomes the harder this is to sustain. So MakerDAO is debating how it might interact with the bureaucracies and government officials, all while mulling how actively it should deploy its capital toward making the future better for everyone.
The next step it takes will likely begin a trail that others follow. If that is to pay taxes then MakerDAO would have to incorporate somewhere.
Registering in a jurisdiction (to “domicile” as it’s known), would send a strong vibe through the DeFi world. DAOs have long been viewed as a way to sidestep state authority and hide organizations in plain sight.
Inevitably, any serious conversation in this young industry gets checked somewhat by the idealism that brought so many people into it. This conversation about legal status is no different. Case in point: Anish Agnihotri, a researcher at the crypto investment firm Paradigm, tweeted, “Unpopular opinion perhaps: I think we’ll have failed if DAOs need to register as LLCs in five years.”
But not everyone views it that way. For example, in 2019, OpenLaw, an Ethereum-based legal protocol, released a legal wrapper for DAOs that connects smart contracts to traditional contracts. It gives organizations limited liability protection.
But disharmony in the space is to be expected. This is a time when many are arguing that the regulatory maelstrom on its way from Western governments could potentially destroy the industry, so folks will line up on the spectrum from resistance to compliance based on how much they are willing to risk their assets for a principle.
In a post that kicked off the conversation for MakerDAO, PaperImperium wrote:
“MakerDAO currently has no legal structure registered in any jurisdiction, notwithstanding the dissolving Maker Foundation and the Dai Foundation. In the U.S., we are almost certainly likely to be classified as a general partnership, which we urgently need an answer for.”
A general partnership is a legal identity that the U.S. imposes on an organization if it hasn’t otherwise registered itself in another category. PaperImperium finds this arrangement particularly problematic for the MakerDAO in light of potential tax obligations.
PaperImperium brings considerable clout to the conversation as the largest governance delegate in the ecosystem. Delegation is a fairly new system in MakerDAO, and delegates are sort of protocol politicians. Users stake MKR to delegates who then participate in governance on behalf of those who have staked to them.
“US history has many examples of a single member of a general partnership being forced to pay the entire tax burden of their partners,” he wrote.
Another member on the forum questioned whether any state was prepared to accommodate DAOs. “Is there a country in the world right now with clear regulatory laws around entities like MakerDAO?,” AstronautThis, from the Governance Core Unit Team, asked in the thread. “I’m all for aiming for a competitive advantage in the face of new regulations and to de-risk the DAO’s future as much as possible but I’m not sure if there’s anything concrete we can do with the regulatory clarity we have right now.” (Since the Foundation’s dissolution, the DAO gets work done through so-called core units.)
Number One Concern
This is a conversation that’s taking place on many fronts. Not long ago, a dialogue opened up about MakerDAO creating a self-insurance fund so that members could be protected if regulators decided to target a contributor to the DAO in lieu of the DAO itself.
But that’s more a workaround than a long term strategy. It’s one thing to get ready for court cases and another to decide whether the DAO should agree to state recognition.
PaperImperium’s number one concern appears to be taxes.
“Given the current political climate in the U.S., desire to increase spending, and growing worry over how to pay for that, I cannot foresee Maker — which pays taxes exactly nowhere – escaping notice, perhaps in multiple jurisdictions at once,” he wrote.
Wouter Kampmann, team lead from another core unit, chimed in to say that he agreed it was a conversation whose time has come, but he also drew a line in the sand.
“We need to step up our legal strategy efforts,” Kampmann wrote, but he also wanted to push his colleagues to stick to their principles.”Panic is rarely a good adviser.”
Noting that the digital era already makes total surveillance a reality and a future where most transactions occur with stablecoins only make it more so, he urged his fellow members of the DAO to take a stand for DAI as an alternative.
“For me there is one important thing we should keep in mind when considering these matters: Any path that leads to legal AML/KYC requirements on the Dai token itself, should be a non-starter.”
In fact, if the DAO finds itself forced to add those features, Kampmann suggested the best move would be to trigger emergency shutdown and simply dissolve the project.