Commentary-20

With regards to their taxation treatment, the distinction between the internet and cyberspace, as outlined by Lawrence Lessig, provides a useful framework to characterize the unique attributes of DAOs vis-a-vis digital entities hosted in the cloud.[^44] While transactions occurring over the internet typically entail a clear correspondence with those of taxable entities with a real-world existence, a DAO cannot be conventionally connected to an agent or location on Earth. This is primarily due to the fact that its processes and procedures are predefined and deterministic, carried out by code existing in cyberspace. Furthermore, the emergence of blockchain-based anonymization techniques and decentralized exchanges compromise the enforcement of a regulatory framework for taxation akin to that of cloud-based agents. In that sense, David Shakow acknowledges that "the pure blockchain form does not work well for an entity under the IRC [United States Internal Revenue Code]".[^45]

Many questions regarding the taxation of DAO remain unaddressed by the tax laws of national jurisdictions. These questions, highlighted by Shakow, include the classification of DAOs as entities under tax law, the tax residence of DAOs, the level at which investments in DAOs should be taxed (entity-level or Member-level), the taxation of Members liquidating their investment, the filing of tax returns and the treatment of Hard Forks as taxable events for Token-holders who receive Tokens from the forked chain. In addition, Airdrops as defined in Article 3(4) pose additional unresolved complexity for the tax laws of national jurisdictions. Despite the difficulties in achieving regulatory equivalence, taxation is material for DAOs to recognize the social and environmental costs inherent in the operation of DAOs that, in the absence of taxation, would be imposed on other members of society.

As the tokenomics of DAOs imply that the value of a DAO is reflected in the value of the Token(s) issued by the DAO or governing the DAO, making DAOs pass-through entities for tax purposes seems to be the correct approach. As such, the responsibility of paying tax on gains should fall on Members and Participants, because in the case of unregistered DAOs, which this Model Law addresses, only Members and Participants are anchored in a jurisdiction. Accordingly, each Member or Participant is solely responsible for declaring their financial stake in a DAO, if required by the jurisdiction in which each Member or Participant is a tax resident. It should be the sole obligation of the Members or Participants to declare their capital gains on the disposition of DAO-related Tokens or similar transactions.