Notes from the ABA Tax Section Meeting

DAOs, Broker Reporting, and cTokens

I had a great time presenting on three panels at the 2024 American Bar Association Tax Section Meeting from May 3-4.

I had three government interactions worth mentioning because they might reveal how the government is thinking about some thorny crypto tax issues:

I. DECENTRALIZED AUTONOMOUS ORGANIZATIONS

Erika Nijenhuis, senior counsel at Treasury, declined to be on the DAO taxation panel but sat in the front row of the audience. I’ve known Erika for years. She is very thoughtful and plays things close to the vest. The most important interaction I had with her was after the panel:

Erika: “How can we give helpful guidance?”

CryptoTaxGuy: “Confirm DAOs aren’t taxable entities if tokens are widely distributed, votes are limited to running or not running self-executing code, and any fees are streamed to holders on a current basis (so there is no diversified treasury).”

Erika: “But those are easy facts. I’m more concerned where income is accruing to an address and no one is paying tax.”

CryptoTaxGuy: “I agree, my facts are easier. Why not provide a safe harbor for them?”

Erika: [Long pause.] “That’s an interesting idea.”

There’s been a lot of hand wringing (including by me) as to whether or when a DAO is a tax entity. Tax entities can be subject to US tax payment, withholding, and/or reporting obligations. I’ve argued at length that a “true” DAO that satisfies the factual criteria I posited to Erika (a la Curve) isn’t an entity.

While a private conversation with Erika can’t be cited as Treasury’s official view, I find it extremely helpful to know she doesn’t seem interested in blowing up on-chain token-based voting mechanisms, even if the tokens control a fee switch. It’s also worth being aware of what troubles her: accrual of income to an unwrapped onchain treasury. Something to consider when structuring a DAO.

II. PROPOSED BROKER REPORTING REGULATIONS

Another panel spent significant time criticizing the proposed crypto broker reporting regs. Chris Wrobel, associate chief counsel in the IRS national office, sat on the panel. Erika again was front row in the audience.

My remarks largely tracked DeFi Education Fund's comment letter to the proposed regs, which I helped author (https://www.defieducationfund.org/_files/ugd/e53159_40d4255857d142f2a1744be79f1dab3f.pdf).

After the panel, Chris said he thought all the concerns I and the other panelists raised were “extremely valid,” adding: “The learning curve for us is steep. And any regulatory guidance has to go through Treasury, which can slow things down.”

Erika also stood up at one point and offered public remarks, reminding the room that the draft Form 1099-DA released a couple of weeks ago does not reflect the 125,000 comments received on the proposed regs, and that Treasury continues to consider those comments.

A May 3 Politico article (https://subscriber.politicopro.com/article/2024/05/crypto-world-taps-ai-to-flood-irs-with-complaints-about-tax-regs-00155690) quotes an unnamed Treasury official to the effect that final crypto broker reporting regs will be issued later this year. In light of Chris Wrobel’s sympathy to comments on the overbreadth of the proposed regs as applied to DeFi, and the absence of pushback by Erika to the panel’s criticisms, my bet would be Treasury finalizes the regs as applied to CEXes and punts on DeFi for now. Fingers crossed.

III. LOOK-THROUGH OF TOKENS

The same panel that discussed the broker regs also covered the IRS’s NFT notice, which treats NFTs as collectibles for tax purposes if their “associated rights or assets” are collectibles. We on the panel pointed out that most NFTs have no associated rights or assets.

Wrobel said the notice’s guidance is narrow: if an NFT conveys ownership over a meatspace collectible, the token should be treated as a collectible, just as if the conveyance were offchain. The notice “does not suggest the application of a look-through rule to tokens more generally.”

There’s a question among tax experts whether LP tokens, cTokens, etc. should be looked thru so holders are treated as engaging in the underlying activities directly. I’ve previously argued no (https://www.friedfrank.com/uploads/documents/cc68fd4ecd02c64da95a5c0752355f73.pdf).

Some people have interpreted the NFT notice to suggest a broader look-through rule for tokens. While it’s possible the IRS thinks look-through is sometimes appropriate, it’s helpful to know that’s not the default. Look-through would often be unadministrable in practice.

IV. CONCLUSION

While I’m often frustrated by Treasury and the IRS’s approach to crypto, I left these conversations with a sense that at least some folks there want to get to the right answers, but might sometimes be inhibited by politics, lack of resources, and/or lack of technical understanding.

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