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Published: December 9, 2022

What to Know About “DAO”? – An Introduction

In its most basic meaning, a decentralized autonomous organization (or “DAO”) is an organizational model that substitutes a decentralized structure of decision-making authority through the use of blockchain and smart contract technology for a centralized decision-making body, such as the Board of Directors of a corporation. Ownership of a DAO’s native token, which gives holders the right to vote on DAO-related issues, organizes a DAO’s governance. Typically, a token owner’s ability to influence the result of decisions is directly proportional to the amount of tokens the holder owns. Developers are either propelled to act where token holder votes demand them via smart contracts that automatically respond to token holder votes, or by the direct democracy system of the DAO.

For years, cryptocurrency developers and enthusiasts have played around with the idea of using DAOs in the cryptocurrency space. For example, one of the best-known running DAOs is the decentralized cryptocurrency exchange “UNISWAP”, which enables transactions between token holders on the Ethereum blockchain. The governance token of UNISWAP, called UNI, can be freely traded between token holders, purchased on cryptocurrency exchanges, and earned through staked liquidity pools that support the decentralized exchange. Through a multitude of off-chain governance tools and smart contracts that allow voting on-chain, holders of UNI tokens have the right to cast votes and initiate changes to the underlying UNISWAP protocol. Developers then assign priority to the proposals that are approved by UNISWAP’s governance mechanism in order to generate and publish them as server upgrades. This allows UNI token owners to directly influence the growth and operation of UNISWAP. UNI tokens have significantly deflated in value after reaching a peak value of over CAD $62 to about CAD $9. Nevertheless, UNISWAP has been attracting a lot of attention from equity investors to expand operations and has emerged as the leading force among decentralized exchange platforms for cryptocurrencies, with a recent valuation of over USD $1 billion and a comeback in the popularity of Ethereum.

The project known as “The DAO,” which was started in 2016 as an experiment to provide stakeholders direct control over a venture capital fund, is another example. Millions of ETH were contributed to a single treasury fund by the first purchasers of The DAO’s token. Holders of The DAO’s native token were then able to put forward and vote on investment plans, and projects that received the most support from the DAO’s treasury would be funded. The security flaws in The DAO’s underlying code that were eventually exploited to steal millions of ETH from the fund shortly after The DAO’s launch immobilized the project. Shortly after The DAO tokens were removed from exchange listings, it ceased to exist.

These two illustrations clearly explain why it is challenging to describe a DAO for tax reasons. In contrast to other crypto tokens, DAO tokens can be used as commodities, sources of income from investments, and tools for governance, much like common shares of a company. A DAO is also not really a separate entity in and of itself. A DAO lacks a physical location and an official hierarchy of leadership. A DAO may profit from the work of development teams that post modifications to the DAO’s core code and, through consensus, assist in guiding the DAO, but this is not in and of itself a formal leadership structure. A DAO cannot by its very nature be run by a single leadership group or individual. Situations in which a DAO is established for a particular objective that is not immediately profitable may be much more problematic.

The tax treatment of cryptocurrencies or NFTs has not been the subject of substantial legislation in Canada, and the Canada Revenue Agency (“CRA”) has not made any public statements regarding its position on the tax implications of participating in a DAO. Only a very small number of jurisdictions have passed laws allowing for the incorporation of and formalizing the tax status of DAOs, such as the Republic of the Marshall Islands, Vermont, and Wyoming in the United States. Additionally, no case involving the taxation of cryptocurrencies has yet been addressed in a Canadian court. Given these difficulties, it is necessary to base the tax consequences of joining a DAO on established legal rules and precedent. One of our knowledgeable Canadian crypto tax lawyers will help you determine the tax repercussions of your plans if you intend to join in or create your own coin or DAO.

What Qualifies as Participation in a DAO for Canadian Tax Purposes?

Under Canadian common law, a DAO might resemble other business vehicles in a number of ways, but it doesn’t fit neatly into any one of those categories. In order to describe how Canadian tax law may interpret a DAO for tax purposes, three key examples of organizing businesses under Canadian law will be examined.

The Corporation and DAOs

Under Canadian law and the legislation of the majority of other countries, corporations are recognized as having separate legal and fictional personalities. Any natural, living person can enter into contracts in his or her name, possess assets, be held liable for contract breaches, buy, sell, borrow, and lend just like a corporation. The corporation’s shares are purchased and held by equity investors in the form of shareholders, who have rights that can be used against the corporation. In general, shareholders are able to exchange their shares with other parties, with the exception of many privately held corporations that are not listed on stock markets.

In most cases, shareholders have no management authority over the corporation. The Board of Directors, who are chosen by shareholders with voting rights that come from their ownership of shares, serves as the corporate brain and is often responsible for managing any associated businesses. However, this need not always be the case. The corporate structure is quite adaptable, and corporations can be set up with a decentralized management structure that is facilitated by different shareholders. However, it is crucial to stress that due to the complexity of designing and managing such an arrangement, this governance model is not typically employed for corporations.

In terms of taxes, corporations are regarded as independent legal persons. In contrast to a natural person who pays tax at progressive marginal rates, a corporation pays a flat rate of tax. Additionally, it may qualify for other tax relief like the Small Business Deduction and Canadian-Controlled Private Corporations, which further lower its tax burden. Dividend payments may be made from the corporation’s after-tax earnings to eligible shareholders. The Canadian Income Tax Act’s principles of tax integration ensure that dividend income paid to shareholders is taxed at a rate that prevents double taxation in the hands of specific shareholders and that the tax paid on income received by a shareholder that was earned by the corporation corresponds to the amount that would have been paid if the income were earned directly in the hands of the shareholder.

In terms of the control that shareholders and token holders have over the organization and the ability to exchange those voting shares or tokens with other parties for value there are undoubtedly many similarities between DAOs and corporations. However, a DAO won’t be recognized as a corporation under Canadian law without further organization. Under Canadian law, a corporation cannot be unintentionally established; it must voluntarily file incorporation documents with the appropriate authorities in accordance with established procedures. Simply put, a corporation cannot exist by operation of law.

Currently, there are no clear guidelines recognizing DAOs as corporate organizations in Canadian corporate statutes. However, some other common law jurisdictions have taken action to do just that. A bill has been approved in Wyoming to give developer-led DAOs a way to become limited liability organizations (“LLCs”), which are normally considered as corporations for the purposes of Canadian tax law. In an effort to draw in more investors and businesses using blockchain technology, legislation of this nature has been introduced in Vermont and the Republic of the Marshall Islands. Given the similarities between DAOs and businesses, it is likely that Canadian lawmakers will implement similar measures in the future, but as things stand, DAOs cannot benefit from corporate tax treatment unless they are formally incorporated.

The Partnership and DAOs

Both common law and provincial statutes in Canada broadly describe a partnership as a relationship between two or more persons who carry on business in common with the intention of profiting from it. Depending on the specific facts and circumstances of each case as well as the intentions of the parties, a partnership may or may not exist. Where parties are involved in a joint effort to make money, a partnership can exist without a formal written partnership agreement or even a verbal agreement. Contributions of resources such as money, property, effort, knowledge, or skill by parties to a shared goal, joint ownership of assets related to the business, sharing of profits and losses, and shared management and control rights over the business are all significant signs that a partnership exists.

A partnership is regarded as a “flow-through” entity for taxation purposes. The Canadian Income Tax Act does not recognize partnerships as separate legal entities, and thus are not subject to taxation on their own. Instead, for the purposes of determining the partnership’s net profits, losses, contributions, and allocations to and from the partners, it is regarded as though it were a taxpayer for tax purposes. Once allocated to partners, the income or loss is now solely their responsibility to bear (i.e., it “flows through” the partnership agreement to the partners).

DAOs shouldn’t be generically categorized as partnerships for three distinct reasons. First off, there is no requirement for DAO token holders to concur in a written or oral agreement to act jointly in order to take part in a DAO or hold those tokens. A written or oral agreement between partners to conduct business together serves as the foundation of a partnership. A major obstacle to DAOs generally being classified as partnerships is the lack of any established guidelines for conducting business with the DAO or as part of an initial offer to establish a DAO. Even if DAO token holders agreed to rules of conduct, it is doubtful that this would be sufficient to constitute a partnership agreement. Not every investment or acquisition of a product necessitates the intention to conduct business jointly.

Second, DAO token holders continue to own their assets and income separately from the DAO. The distribution of profits among partners and each partner’s undivided interest in any property used by the partnership are two of the most important elements of a partnership under Canadian common law. Participants in a DAO may own tokens in their individual capacities, and barring an exception, they will not be required to split any gains or losses with other token holders when a holder decides to sell his or her tokens. The lack of joint ownership of property and a division of profits or losses is significant proof that DAO participants are not partners in general.

Third, a DAO’s participants and the DAO itself might not have a profit-driven goal. A DAO is really just a way to use cryptocurrency and blockchain technology to build a direct democracy system. In general, non-profit organizations with a social or cultural goal are not regarded as partnerships. Theoretically, a DAO may be set up for any number of initiatives that don’t necessarily include conducting business with the intention of making a profit. Users could create a DAO to fund the purchase of property for preservation, to raise money for a political figure or social cause, or to support other non-profit community causes. This stands in stark contrast to a DAO that practices venture capitalism, such as The DAO, and was established specifically to benefit token holders.

We can see from this that it is improper to categorize DAOs as partnerships in general. However, the partnership classification might still be relevant in a DAO system. Given the right set of circumstances, the development team in charge of creating and maintaining the code that powers the DAO, for instance, might be considered a partnership. A new crypto token for a DAO may be launched by a development team made up of a specific number of programmers, and they may hold a portion of the tokens that are released jointly. In order to preserve the value of the DAO and its underlying tokens, that development team may continue to release updates for the DAO source code. They may also decide to sell those tokens for a profit. Given a similar set of conditions, a partnership between those developers would be feasible. A partnership may alternatively be defined as a formally organized group of DAO token holders who actively participate in the DAO through voting and trading their tokens for mutual gain.

Unincorporated Entities and Joint Ventures

An unincorporated entity is an organizational structure with no unique recognized status or unique tax treatment under the Canadian Income Tax Act. The relationship between parties in an unincorporated entity is governed strictly by applicable contract law. Unincorporated entities are not flow-through entities like partnerships, and are not treated as separate from participants for tax purposes. Thus, each participant is taxed in an individual capacity, and any gains or losses earned from participating in the unincorporated entity are attributable to the taxpayer alone.

An organizational structure that does not have a special recognized status or unique tax treatment under the Canadian Income Tax Act is known as an unincorporated entity. The parties’ interaction inside an unincorporated entity is tightly governed by applicable contract law. For tax purposes, unincorporated entities are not recognized as separate from participants because they are not flow-through entities like partnerships. The gains or losses derived from participation in the unincorporated entity are therefore attributed to the taxpayer alone, and each participant is subject to individual taxation.

A “joint venture,” which is a unique business structure where venturers collaborate with one another to pursue a specific commercial goal, is an example of an unincorporated entity recognized under Canadian law. The Tax Court of Canada has established three distinguishing traits for figuring out whether a joint venture is present:

  1. In the venture’s subject matter, there is a joint property interest;
  2. A right to mutual management and control of the business venture exists; and,
  3. The venture’s goal is restricted to a single endeavor or a select number of linked undertakings.

Despite the fact that joint ventures and partnerships have many similarities, a joint venture is not a residual category for businesses that don’t meet the requirements for partnerships. However, it would be challenging to categorize DAOs generically as joint ventures for the same reasons that apply to partnerships. The majority of DAO examples don’t involve a specific number of venturers participating in a business for a single purpose or a series of connected purposes.

A DAO is a dynamic governance system that is open to modification, allowing token holders to decide on the DAO’s future collectively. Additionally, it is common for DAOs to lack written agreements that would show an intention to form a joint venture. However, like partnerships, this classification is incorrect for DAOs in general. It is likely that the classification is valid where an organized sequence of venturers engage with one another through a DAO to achieve a specific task. However, for the same reasons that apply to partnerships, it might be conceivable for DAO developers or organized groups of investors to form a joint venture when there is enough proof that they want to work together on a business.

A DAO, or cooperative groups of DAO token holders, may be significantly easier to classify as unincorporated entities under Canadian tax law. A token holder may not have any intention to establish a specific business relationship with other token holders simply because a DAO permits direct democracy between participants. Then, holders of DAO tokens would enter into agreements to engage in trade and carry out other DAO-related functions, and they would become liable for personal income taxes. The ultimate classification of a DAO, or holders of DAO tokens, will continue to be highly influenced by the underlying details and particular connections that exist between participants.

DAO Tokens’ Tax Treatment

A DAO token owner may be charged taxes for taking part in a DAO in one of two ways. A DAO token owner can initially purchase, hold, and trade DAO tokens for gain or loss. Second, a DAO token holder may be rewarded for proof-of-stake (“staking“) or proof-of-work (“mining“) activities that are performed to protect the DAO network, or under any other reward system that the DAO may provide to participants in the DAO. The tax implications of both are covered in the sections that follow.

Taxation of DAO Token Dispositions

According to the Income Tax Act, a taxpayer’s income for a specific taxation year is calculated using income from both domestic and international sources. The Income Tax Act characterizes and treats some types of income differently, including income from business, property, and employment. Income from cryptocurrency assets can be treated in one of two ways under the Income Tax Act: as income from a business or investment, or as capital gains from the sale of property.

A taxpayer’s sources of income that are fully taxable are business income and investment income, which are obtained from the sale of inventory or as a yield from property, respectively. Only half of a capital gain that occurs from the sale of property is subject to taxation. When a taxpayer earns income, classifying that money as a capital gain offers a sizable tax benefit. It is preferable to characterize a taxpayer’s tax loss as coming from a business when it occurs. A capital loss will only be deducted against the half of other taxable capital gains, whereas a business loss is fully deductible against all sources of income.

The type of income earned affects the nature of the asset disposed of under the Income Tax Act, so identifying the type of income earned or loss incurred is the first step in the examination. As previously stated, no Canadian court has made a determination regarding the taxation of cryptocurrencies, and the CRA has not offered any cogent recommendations regarding how to classify cryptocurrencies for tax purposes. However, there is a plethora of case law that has emerged via Canadian tax courts that describes the distinctions between capital gains and business and investment income, which would apply to cryptocurrency transactions. Although no single element can be used to determine whether a property transaction is a business or a capital sale, there are a number of essential factors to consider which include:

  • The type of sold property;
  • How long the taxpayer has owned the property;
  • The taxpayer’s history of similar transactions, including their frequency or number;
  • The labor invested in or related to the property realized;
  • The circumstances that led to the sale; and,
  • The purpose for both the taxpayer’s purchase and selling of the property is crucial for cryptocurrency holders.

Therefore, the factual circumstances behind a taxpayer’s acquisition and disposition of a DAO token, as well as the specific business vehicle the DAO token holder is using to conduct business, will affect how that transaction is taxed. If you deal in other related or unrelated cryptocurrencies or investments, your level of participation in the DAO’s democratic elements, your reasons for selling, and other factors will all be taken into consideration when determining whether your income from a disposition will be taxed as capital gains or as business income.

What distinguishes dealing in DAO tokens from dealing in other cryptocurrencies with regard to tax treatment is unclear. Any gains or losses incurred will be completely attributable to you, whether you are working alone or as a member of an unincorporated entity. If you are functioning in a partnership with other DAO token holders, the income or loss must be computed for the partnership as a whole and shared among partners for tax purposes. Due to the way tax attributes are distributed, this will call for some thoughtful decision-making on the side of the partners and could present further options for tax planning.

How the Acquisition of Token Rewards for Participating in DAO is Taxed?

The world of cryptocurrencies is always changing and developing. In the past, token holders could acquire new tokens by taking part in staking or mining activities to protect the blockchain of the associated token. While owning a specific token, a token holder may also profit from airdrops that distribute treasury tokens or from other similar and unsolicited crypto gifts. It is conceivable that new and innovative systems of rewarding token holders for their participation (particularly in a DAO with direct token holder participation) may emerge given the rise of DAOs, the increasing complexity of smart contracts, and the limitless creativity of cryptocurrency developers. The next section will go over some of the factors to take into account when determining how receiving DAO reward tokens may be treated for tax purposes.

Tax-Free Windfalls and DAOs

A taxpayer may not treat airdrops, undistributed coin or any unsolicited rewards they receive without intending to use them for commercial purposes as a source of income. According to the “source theory” of income, which is followed in Section 3 of the Income Tax Act, only income derived from productive sources is subject to tax. As a result, since they are not derived from a productive source, lottery winnings and gifts are typically not taxable in Canada.

The token may be treated as a pure windfall gain and won’t be included in the taxpayer’s taxable income if it is received without any organized effort or pursuit of profit on the part of the token holder, the distribution is not regular or recurring, and the holder is not given an enforceable claim against the distributor. Given the clear connection between participation and reward, it appears improbable that a token holder would acquire new tokens as a result of their active engagement and voting in a DAO.

Income from Holding DAO Tokens Is Fully Taxable

Distributions of DAO tokens based on rewards could likewise be considered fully taxable income from a business or an investment. Investment income includes the passive yields from property, such as corporate stock dividends, bond yields, and property rents. In order to generate business income, the taxpayer must engage in more activity and make an attempt to be organized. Managing a portfolio of investments or continually looking for new opportunities to boost returns on investment are examples of this.

Depending on the specifics, a DAO token holder getting rewards could feasibly be viewed as an investor or as a business owner. An individual who buys DAO tokens as a long-term investment, receives the tokens, does not actively trade the tokens, and receives some staking income may be considered to be earning investment income.

Tax Pro Tips: Know the Filing Requirements Not to Get Caught Off Guard

DAOs’ unclear tax treatment does not lessen a taxpayer’s potential crypto tax reporting requirements. For instance, the accidental creation of a partnership may have significant effects on the necessity of filing taxes. The Income Tax Regulations mandate that non-exempt partnerships file a T5013 Information Return for each year the partnership carried on business in Canada, in addition to the general complexity in calculating and allocating taxes in a partnership. Each partner would be required to submit reports to the CRA that included information about them individually, the partnership’s income and losses, how profits and losses were divided, and any credits and deductions.

The non-compliant partnership and partners may incur substantial penalties for failing to file when required. A maximum fine of $2,500 may be assessed against a partnership or partner who fails to fully comply with their duty to file the return on time. This penalty will be applied for each year the return is late. Every required form that is not filed with the return will incur this penalty, and further fines may be assessed for continued failure to file.

Ignorance is not an excuse for failing to file your taxes. It is vital to comprehend how you are developing working relationships with other taxpayers and how you are interacting with the DAO itself when operating in uncertain territory, as is the situation with a DAO. Every choice you make could have an impact on your individual tax obligations and filing requirements. If you are a Canadian taxpayer who intends to acquire and hold tokens of, participate in, or establish a DAO, or if you have previously participated in a DAO, you should definitely consult with an expert Canadian cryptocurrency tax lawyer.


A Decentralized Autonomous Organization (“DAO”) is what?

Blockchain and smart contract technology enable a decentralized decision-making body known as a DAO. A DAO establishes a direct democracy among DAO token holders, doing away with a centralized decision-making body like the Board of Directors of a company. A token holder often has a certain number of votes, which is based on the number of tokens such a holder owns. A DAO has no defined organizational structure and can be run for profit or charitable purposes.

How Might a DAO Be Treated Under Canadian Tax Law for Tax Purposes?

In Canada, a DAO is not by itself recognized as a business vehicle; instead, the treatment of a DAO under Canadian tax law is highly dependent upon the circumstances. An organized development team, for instance, that collaborates to maintain a DAO, facilitate token holders’ control over the DAO, and make profit from those activities may be involved in a partnership or joint venture.

For Canadian Tax Purposes, is a DAO a Corporation?

No federal or provincial statutes in Canada regulate a DAO as a corporation. Given the parallels between the two organizational structures, certain common law jurisdictions, like Wyoming and Vermont, have taken action to grant DAOs status as corporations. It is not improbable that DAOs would be subject to comparable tax filing and regulatory responsibilities under future rules covering crypto tax in Canada that take a similar stance toward them.

How Might My Voting in a DAO Affect the Taxation of My Tokens?

The taxability of your cryptocurrency assets will be determined in part by various factors, one of which will be your voting activity. Your reasons for purchasing a DAO’s tokens and your participation in voting for the DAO may affect whether the income of the sale of those tokens are recognized as capital gains or as fully taxable income. Additionally, the way you vote could influence whether your DAO reward token income is considered to be a form of business income, investment income, or even a tax-free windfall. To find out how to tax your DAO holdings specifically, get the advice of an experienced Canadian crypto tax lawyer.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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