Tax Policy for Stablecoins and DAOs: A Peek Into the Future

Abstract

Blockchain technology, perhaps the most revolutionary invention of the 21st century, was popularized by introducing the world's first cryptocurrency 'Bitcoin.' However, despite many purported advantages offered by cryptocurrencies, they eluded mass adoption due to their extreme volatility. This flaw led to the ideation of an alternate cryptocurrency, 'stablecoin' which have seen their popularity surge almost 10x within a year. Further, the world has also witnessed the evolution of new business structures in decentralized autonomous organizations ('DAOs') where ownership and management intermingle with the help of smart contracts driven blockchain technology.

The profoundness of these new-age concepts could see them become the inherent elements of the global economy soon. This development would also necessitate devising new tax policies to cater to the crypto and blockchain-driven world. So far, not much has been discussed or debated around the income-tax implications for these concepts. With this background, the authors have deep-dived into the concept of stablecoins, their mechanics and explored the possible income tax implications throughout the lifecycle of different stablecoins. The authors have also discussed the concept of DAO along with a real-world case study, examine conceivable income tax offshoots that could arise due to DAO's unique nature, and sign-off with a suggestion on the probable solution.

Keywords: Taxation of Stablecoins and Decentralized Autonomous Organizations, Taxation of DAOs, Emerging Tax Policies, Taxing virtual currencies, DeFi, MakerDAO, Dai

JEL Classification: F3, F39, G28, H2, H20, H21, H24, H25, K20, K34