A Decentralised Autonomous Organisation (DAO) that is part of the crypto world. Here is what we know about it.
Accounting Treatment for DAO: How Does it Work?
DAO Defined
The “DAO” was a 2016 project that resulted in the hard fork of Ethereum that gave birth to ETC and ETH. This project began at an exciting time in the Ethereum community, when prices were rising and Ethereum’s notoriety was growing.
A DAO is an autonomous and decentralised organisation that functions without the need for centralised parties to make decisions. They don’t need to rely on othersfor the organisation to grow, be profitable, or *physically* exist to serve its overall purpose.
A DAO can be an on-chain contract or a collection of on-chain contracts that work together to complete a larger organisational function. DAOs are defined more broadly by some. Some might argue that Bitcoin is a DAO in and of itself.
The idea was to establish a decentralised venture capital fund. Members would contribute ETH and then vote on projects they thought should be funded. A lot of money was poured into “The DAO.” This project ultimately failed, but it did lay the intellectual and coding foundation for the DAO environment that exists today.
It is a community-driven organisation with no central authority. It is fully transparent and autonomous. Smart contracts establish the ground rules, execute the agreed-upon decisions, and proposals, voting, and even the code itself can be publicly audited at any time.
DAO From An Accounting Perspective
At the moment, there is no specific guideline or set of rules for how accounting contributions to and receipts from a DAO should be treated. Cryptocurrency paid from a DAO’s ETH address for goods or services is taxed in the country where the sale or work was performed.
Entities are considered taxable when partners agree to collaborate and split profits. DAOs clearly fit this definition. DAO participants collectively agree to the smart contracts that govern it in exchange for a share of its income.
How A Pledger Works with DAO
A pledger is a person or company who sends money to a DAO. Contributions to a smart contract are not tax deductible unless the DAO has a legal non-profit incorporation. Each cryptocurrency transaction, like all others, would necessitate an examination of the liability for capital gains/losses.
If the Pledger tracks the distributions of DAO funds to each recipient, there may be an opportunity for a tax write-off if one of the entities funded is a non-profit.
If your company receives a DAO grant for a product or service, it will be classified as income using the USD value at the time of transfer, in accordance with your spot price marking policy. A capital gain / loss calculation is incurred if the income is not converted to fiat upon receipt.
In Conclusion
DAOs, like other projects in the Decentralized finance (DeFi) space, have created a transaction economy that does not fit well into our current structures. Given the lack of a solid framework, the best anyone can do is follow the rules we know and do our best to apply them.