A DAO or decentralized autonomous organization is basically a computer software program running on blockchain technology and managed by a union of members. These members have voting rights on any proposal to change the organization. The voting power of a member is determined by dividing the person’s digital assets by the total digital asset amount.
No Director Board
Most of the time, a DAO operates without a director board or any governing body. It offers a secure and reliable platform to bring together resources and individuals for achieving a united goal. The goal of many DAO is to generate investments. The process starts when investors transfer their assets like Ether to the DAO for exchanging them with DAO tokens. These tokens represent the member’s holding in the selected DAO. Depending on the way DAO has been defined, the DAO tokens may not always represent ownership. They may be limited to the governing rights over the DAO assets.
The Smart Contract
Token holders vote collectively on the investment proposals of the applicants. When an investment is accepted, the resulting profits or losses of the project are shared among the token holders. The whole process can take place without any human intervention because of the smart contract computer code.
DAO’s Tax Classification
The DAO may seem like an online creation with no real-world character. However, it still falls under the tax laws. The US tax regulations stipulate that any joint venture or contract with an agreement creates a different entity. The members participate in the financial operation, business, trade or venture activities. The holding comes under the tax laws if the project’s profit is distributed to the members.