Since the formation of the first decentralized autonomous organization in 2016, their use has exploded. Thousands of DAOs now try to take advantage of smart contracts to solve a problem that plagues business entities: the gulf between ownership and management. Armed with smart contracts and requiring token-holders to vote on any change in strategy, DAOs dispense with the management layer so necessary in traditional business entities.
DAOs owe their existence to technology. Without blockchain, without cryptocurrency, and without smart contracts, there would be no DAOs. But they owe their explosive to something much more unexpected: Treasury regulations.
In the wake of limited liability companies, the last major new entity to emerge, Treasury created the check-the-box regulations. Prior to these regulations, a business entity had to determine whether it had more partnership or corporate characteristics to figure out whether it would be taxed as a partnership or a corporation. LLCs did not fit comfortably into either category, so businesspeople did not adopt the form. When enacted, the check-the-box regulations allowed most business entities to decide how they wanted to be taxed and file an election with the IRS for that treatment.
This certainty futureproofed entity taxation. New business forms—including DAOs—no longer have to look like previous forms. They can choose their tax status. And without the impediment of taxes, people can—and did—adopt the DAO structure.
Tax entity status comes with obligations, though. And while DAOs do not have to worry about their entity status, they do need to meet the obligations attendant to the status they choose. This Article discusses several of those obligations, obligations which, at times, run counter to the ethos of DAOs.
Brunson, Samuel D.
"Standing on the Shoulders of LLCs: Tax Entity Status and Decentralized Autonomous Organizations,"
Georgia Law Review: Vol. 57:
2, Article 4.
Available at: https://digitalcommons.law.uga.edu/glr/vol57/iss2/4