Before I begin, I am not a lawyer, nor am I a tax advisor. This article is not legal advice. This article is not tax advice. It is, however, a question about whether Decentralized Autonomous organizations (DAOs) can operate as Barter Exchanges in the United States.
What is Bartering?
First, a definition describing bartering may help. According to Topic №420 Bartering Income from the Internal Revenue Service (IRS), bartering can be defined as “… the exchange of goods or services.” In a PDF titled Bartering and trading? the IRS gives an example of bartering between a lawn maintenance company and an attorney.
An example of this is if you own a lawn maintenance company and receive legal services from an attorney and pay for those services by providing an agreed upon amount of mowing and maintenance services at the attorney’s home or place of business.
Is bartering taxable?
Okay, bartering is an exchange of goods or services (not necessarily cash). Does this mean that bartering is taxable? This is a resounding yes! Once again, the IRS provides an example even though no cash is exchanged.
In bartering, usually there’s no exchange of cash. An example of bartering is a plumber exchanging plumbing services for the dental services of a dentist.
Going back to our lawyer and lawn maintenance example from the IRS:
In this scenario, the fair market value of the legal services provided is taxable to you as the lawn maintenance company owner. At the same time, the fair market value of the lawn and maintenance services you provide is taxable to the attorney or his firm.
The IRS further clarifies that:
This type of transaction — bartering or trading — can prove to be useful when cash-flow problems would otherwise prevent you from securing needed goods or services. And, while there is no exchange of cash or credit, the fair market value of the goods or services that were exchanged is taxable to both parties and must be claimed as other income on an individual or business income tax return.
Confirming that both parties in this scenario have a taxable transaction.
So how does this relate to DAOs?
In the article, WHAT IS THE LEGAL TREATMENT OF PAYMENTS TO DAO CONTRIBUTORS? Jacqueline Radebaugh of Jason Wiener p.c., a public benefit corporation, writes about starting a dialogue about legal uncertainty in DAOs.
Two topics brought up in this article are payments to DAO contributors and Barter Exchanges. Jacqueline states that:
The tax treatment of payments made by the DAOs to its contributors (and community members?) is one of the aspects I have not heard much about. These payments are called rewards, patronage, bounties, and others, and are often made in the form of tokens — ERC20, utility, stablecoins and other cryptocurrencies.
Later in the article, she notes:
Now, it is true that the rules refer to payments typically made in the form of cash; and DAOs don’t often do so — as I mentioned, compensation in the DAO context may be made in a variety of forms which may or may not have market value. The concept of barter may then play a role here. Bartering is the exchange of goods or services usually without the exchange of cash, and it doesn’t include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis (the IRS’ example is a babysitting cooperative run by the neighborhood parents).
Barter transactions must be reported in a 1099-B by what is known as barter exchanges — platforms where people offer their goods or services to be exchanged. When the barter does not pass through an exchange, it does not need to be reported in a 1099-B, however, if the payment falls within the payments that required a 1099-MISC, then the 1099-MISC might be required.
So given that DAOs use “…rewards, patronage, bounties, and others, and are often made in the form of tokens — ERC20, utility, stablecoins and other cryptocurrencies,” they COULD be designated as Barter Exchanges. Since no cash is transferring, and cryptocurrencies are, this COULD be deemed a barter transaction requiring a 1099-B or 1099-MISC, depending on the situation.
The 1099-B and the 1099-MISC
Publication 525 (2021), titled Taxable and Nontaxable Income, has a section called “Miscellaneous Income.” This section brings up form 1099-B. If parties exchanged property or services in a barter exchange, the payor must send a 1099-B to the payee and the IRS.
Additionally, a “Backup Withholding” is also levied to account for income tax. According to the snippet below, if a party does not give their Taxpayer Identification Number, the barter exchange may withhold 28% of barter income to pay for that income tax.
However, and this is a big however, there are exceptions! The article titled Instructions for Form 1099-B (2021) Proceeds From Broker and Barter Exchange Transactions provides an exception. Specifically, if a Barter Exchange doesn’t go over 100 transactions per year, they are not required to file a form 1099-B. However, an opening line in this section (paragraph 1)opens the door for filing a 1099-MISC.
Are you still there 1099-MISC?
So by this point, we have determined that payments to contributors from a DAO COULD be taxable transactions as a barter exchange. The Barter Exchange must file form 1099-B to the IRS unless they do less than 100 transactions during the year. This exception would eliminate the need for a 1099-B. However, a 1099-MISC may be required.
This brings me back to the article mentioned above, Bartering and trading? The IRS provides a reminder about the 1099-MISC.
Remember, just like payments made with money, if a business makes payments of bartered services to another business (except a corporation) of $600 or more in the course of the year, these payments are to be reported on Form 1099-MISC.
However, and this is a big however, there SEEMS to be some exceptions. A 1099-MISC is required “…for each person in the course of your business to whom you have paid the following during the year.” Of note, the second part of this section starts with the phrasing “At least $600 in:” Potentially, this statement leads me to believe that if a payor, in this case, the DAO, limits payments to each contributor to no more than $600, reporting via a 1099-MISC may not be required.
Capping Contributions of DAOs
Given this research, an idea for DAOs using bounty boards is capping payments where no more than $600 is paid per person and no more than 100 total (via the Barter Exchange) transactions per year. Would this eliminate the need to file taxes? No. A form 1040 for the Barter exchanges would be required and need to address the income tax withheld from those not comfortable providing their Tax Identification Number (TIN). This allows a choice for those in the DAO to remain anonymous if desired.
What am I missing?
As I mentioned at the beginning of this article, I am neither a lawyer nor a tax advisor. This article is not legal advice. This article is not tax advice. It is, however, a question to start the discussion on whether DAOs can operate as Barter Exchanges in the U.S. Given this, I am probably missing something, but as Jacqueline Radebaugh said, “I don’t pretend to have it all figured out, but I’d like to start the dialogue.”
Some additional questions I have:
- Does this require the use of something like BrightID for Know Your Customer rules(KYC)?
- How does this apply to international contributors in the DAO?
- Am I missing or misinterpreting these regulations?
- is the 1040 form the only required filing?
- Are there any tax advisors and or lawyers that would like to barter for answers? I would love to get your insight and thoughts on the subject.
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