Sebastian Sinclair

Looking to the future, policymakers in Arizona referred an <a href="https://www.azleg.gov/legtext/56leg/1R/bills/SCR1007P.pdf" target="_blank" rel="noreferrer noopener">amendment</a> to the state constitution in the Arizona State Legislature last week, seeking to exempt digital assets from property taxation.



Following its second reading on Jan. 23, the resolution now has a small shot of making it to a ballot initiative. If approved by a majority vote in the legislature and subsequently passed by voters, the amendment would make crypto tax-exempt at the state level.



It would also make it one of the more favorable states for tax purposes, alongside Wyoming, which passed a law <a href="https://blockworks.co/news/daos-favor-classic-tax-havens-passing-up-crypto-friendly-us-states">recognizing a DAO’s legal status</a> as akin to a limited liability company. 



Arizona had originally toyed with the idea of making <a href="https://blockworks.co/news/arizona-considers-making-bitcoin-legal-tender">bitcoin legal tender</a> early last year, but that bill was subsequently <a href="https://legiscan.com/AZ/text/SB1341/2022" target="_blank" rel="noreferrer noopener">shelved</a> shortly after being introduced.



On a federal level, all individuals are required to pay income and capital gains taxes, but individual US states approach taxation differently, with some eschewing the concept of capital gains or personal income tax altogether at the state level.



Income tax at the state level is triggered when a user produces additional income deriving from mining, staking or airdrops, while capital gains (or losses) are triggered when a cryptoasset is disposed of on the basis of its cost basis and sale price.



Aside from Arizona, here are four other “friendly” states based on regulatory and tax advantages ahead of the federal tax filing deadline come April 18.



<h3>Wyoming</h3>



Wyoming, long-viewed as one of the country’s most progressive crypto regions, does not collect personal or corporate income tax. The state also began regulating the industry early on by introducing a financial <a href="https://wyomingbankingdivision.wyo.gov/banks-and-trust-companies/financial-technology-sandbox" target="_blank" rel="noreferrer noopener">technology sandbox</a> for testing financial products and services.



As mentioned, it formally legalized DAOs in 2019, allowing for clearer guidelines on how those entities would be taxed. Typically, LLCs don’t pay taxes on business incomes, but instead, members are required to pay taxes on their share of the LLC&#8217;s profits.



The state also passed its <a href="https://blockworks.co/news/legal-expert-avanti-may-face-uphill-battle-getting-fed-payment-access">charter for banks</a> dealing in digital assets back in 2019 making it possible for crypto firms to both hold customer cash deposits and custody crypto — later able to be traded on exchanges.



High electricity prices have caused some crypto miners to balk at setting up shop in the state, though Wyoming has recently attempted to tackle the issue by introducing two bills that may result in bitcoin <a href="https://blockworks.co/news/pro-crypto-wyoming-not-yet-pro-enough-to-attract-bitcoin-miners">miners paying less</a>.



<h3>Texas</h3>



Like Wyoming, Texas allowed for <a href="https://www.dob.texas.gov/sites/default/files/files/news/Industrynotices/in2021-03.pdf" target="_blank" rel="noreferrer noopener">chartered banks</a> to custody digital assets in June 2021, which was viewed at the time as a way to tap into the state&#8217;s booming domestic crypto market. 



Coinciding with its cheap electricity — beneficial to crypto mining activity two years ago — the state also features no income tax.&nbsp; Still, Texas does not recognize crypto as legal money and instead is concerned with the asset class as a taxable commodity on a transactional basis.



The state does not require firms, such as exchanges, to obtain a money transmitter’s license. It also passed its <a href="https://freemanlaw.com/cryptocurrency/texas/" target="_blank" rel="noreferrer noopener">Texas Virtual Currency Bill</a> in 2021 which provides a legal definition of digital assets. There is no income tax in the state.



Miners too benefit from a favorable framework that was put in place for firms to profit from 10-year tax abatements and tax credits, alongside additional state training for their workforce.&nbsp;



<h3>Florida</h3>



Florida, like Wyoming and Texas, does not feature a state income tax.&nbsp;



The state has a number of high-profile politicians opting for local crypto and blockchain regulation, including Miami Mayor Francis Suarez, who previously pushed for city residents to <a href="https://www.newsweek.com/miami-passes-resolution-allow-paying-city-workers-bitcoin-attempt-woo-big-tech-1568784" target="_blank" rel="noreferrer noopener">receive their paychecks</a> and pay for their property taxes in bitcoin.



While the state’s governor <a href="https://blockworks.co/news/desantis-says-florida-should-be-willing-to-accept-taxes-in-crypto">Ron DeSantis floated the idea</a> of allowing businesses to pay taxes using crypto to Florida’s Legislature’s 2022 session, his proposed measures failed to pass. 



As such, the state currently does not address the sales and use tax treatment of transactions involving crypto though, like Wyoming, a money transmission license is not required courtesy of changes made to <a href="https://www.flsenate.gov/Session/Bill/2022/273" target="_blank" rel="noreferrer noopener">House Bill 273</a>.



<h3>Colorado</h3>



Colorado, unlike other states listed, does tax income at 4.55% including wages and salaries deriving from crypto activity.&nbsp;



The outlier here is that Colorado is attempting to position itself as a crypto-friendly state by ensuring broader digital asset use cases for tax purposes.



In September of last year, Colorado’s Department of Revenue <a href="https://blockworks.co/news/colorado-residents-can-now-pay-state-taxes-with-crypto-for-a-fee">began accepting crypto as an additional form of payment</a> for all resident taxpayers, becoming the first US state to do so.&nbsp;



That includes individual income tax, business income tax, sales and use tax, withholding tax, severance tax and excise fuel tax.



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These 5 Crypto-friendly US States Show Initiative on Tax Laws

Michael Bodley

The Marshall Islands is taking a notable step forward in terms of regulating <a href="https://blockworks.co/news/the-investors-guide-to-daos" target="_blank" rel="noreferrer noopener">DAOs</a>: legally recognizing both nonprofit and for-profit versions of the autonomous organizations like limited liability companies (LLCs.)



It marks the latest move by the island nation to make a play for a slice of the big money behind DAOs. And it comes on the heels of the increased prospects for <a href="https://blockworks.co/news/new-crypto-bill-suggests-some-daos-be-taxed-like-businesses" target="_blank" rel="noreferrer noopener">tighter scrutiny</a> of digital asset operators by financial watchdogs. That’s perhaps especially true in the US, as politicians and regulators alike search for the best path forward after FTX’s bankruptcy. 



The bill behind the Decentralized Autonomous Organizations Act of 2022 became law on Wednesday, a government representative said in a statement.&nbsp;



Here’s what the incoming legislation — which the government billed the first of its kind — does, according to the statement:



<ul>
<li>Establishes a DAO registry, overseen by the local DAO-focused firm MIDAO, to </li>



<li>Allow any type or size of DAO to incorporate in the Marshall Islands under an LLC structure under the newly created designation of DAO LLC. Registrants must delineate their structure to MIDAO as either “member managed” or “algorithmically managed,” per the legislation.&nbsp;&nbsp;</li>



<li>Potentially “reduce or eliminate fiduciary duties” for DAOs, according to the text. The measure may exempt decentralized entities, and their corresponding smart contracts, from certain stringent typical LLC requirements.</li>



<li>Permit, from a regulator perspective, the decentralized collectives to engage in their typical course of business, including the following: governance measures (such as voting on community proposals) and investment activities, such as tokenization .</li>



<li>Sets up a government-run investment fund to “continue education and training around DAOs and how to integrate them further into the economy.”</li>
</ul>



Earlier this year, the nation passed a law to set regulatory standards strictly for nonprofit DAOs — leaving many collectives in the business of making money in legal limbo. It wasn’t a crypto-specific measure, either, but rather an update to existing LLC rules to include DAOs. Yet it didn’t detail a legal standard for what a DAO actually is.&nbsp;



<h3>Marshall Islands courting DAOs with laws</h3>



Bransen Wase, the Marshall Islands’ finance minister, said in a statement that the country is committing its “courts and resources to the burgeoning world of decentralization, and recognizes the unique place that decentralized autonomous organizations can hold not just in the blockchain space, but in the broader economy as well.”



The initial effort places the Marshall Islands in contention with a select number of jurisdictions worldwide that have already made a serious political push to recognize DAOs. The state of Wyoming is the prime example. 



Industry participants say regulatory first-movers are in prime position to capitalize, in terms of potential tax revenue that would balloon if the digital groups <a href="https://blockworks.co/news/daos-see-ftx-silver-lining" target="_blank" rel="noreferrer noopener">continue to multiply</a>. Seeing those governmental dollar signs, of course, would not be on the table for nonprofits alone. 



That is, if those in power can figure out a comprehensive-but-fair framework for doing so.



How the DAO community reacts, in particular, to the up-and-coming know-your-customer mandates is still up in the air. There’s long been a spirit of anonymity, or pseudonymity, among decentralized proponents — as well as a distrust of governmental bodies, at least in certain circles.  



Adam Miller, MIDAO US-based chief executive who has worked closely with Marshall Island officials on the Decentralized Autonomous Organizations Act, told Blockworks that it’s crucial for DAO employees — and even members — to comply with those standards.



“What a lot of people don&#8217;t realize is that if you&#8217;re working as part of a DAO, or you&#8217;re a member of a DAO in any way, you can&#8217;t just say, ‘Well, we&#8217;re just gonna’ not be [subject to], in any way, the law, right?” Miller said. “You can&#8217;t just back out and say, ‘We&#8217;re just not going to be involved with the legal system.’”



The impetus for the legislation, according to Miller, stemmed from a series of conversations between vocal, and some local, DAO participants and government officials. It was an idea that came to mind when Miller and other industry participants were pushing for the government to roll out its own cryptocurrency in 2018. The initiative — ambitious, especially at the time —<a href="https://davidgerard.co.uk/blockchain/2021/06/04/the-marshall-islands-sov-cryptocurrency-the-saga-winds-down/"> ultimately failed</a>.



“We all started working on it together and thought, ‘OK we recognize that DAOs didn&#8217;t have a good way to incorporate at the time. And, so, we just started thinking, ‘Is this a problem we can help solve?’ And that&#8217;s what ended up leading to initially proposing an amendment to the nonprofit entities act last year, and then eventually drafting this new legislation this year.”



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The Marshall Islands Wants Money-making DAOs To Call It Home

Bessie Liu

Jack Kubinec

<div id="highlights-block_635c1af1eaf96" class="highlights">
 <ul>
 <li>Proper legal frameworks need to be developed to protect individual members of DAOs for being personally liable for actions and obligations</li>
 <li>Wyoming’s laws do not take into account the uniqueness of DAOs, crypto-focused attorney says</li>
 </ul>
 
</div>



Despite the push in select US states to become more appealing to DAOs, blockchain protocols and assorted decentralized collectives are still often opting to incorporate in traditional tax havens.



The trend has something to do with definitions: DAOs (<a href="https://cms.blockworks.co/the-investors-guide-to-daos/" target="_blank" rel="noreferrer noopener">decentralized autonomous organizations</a>) are fairly well-understood in crypto circles. That definition, however, does not hold water with the SEC or state-regulators who are sure what to make of DAOs: from how they’re structured to what taxes they may owe.



DAOs, primarily, are a group of individuals who use blockchain tech and on-chain voting mechanisms to make business decisions.&nbsp;



Most commonly deployed in decentralized finance (DeFi) governance today, the emergence of DAOs has raised legal concerns around the world.



In the US, select states have made bold attempts at creating corporate structures that provide legal protection for those participating in DAO endeavors.&nbsp;



Among them is <a href="https://www.google.com/url?q=https://cms.blockworks.co/pro-crypto-wyoming-not-yet-pro-enough-to-attract-bitcoin-miners/&amp;sa=D&amp;source=docs&amp;ust=1666985534481409&amp;usg=AOvVaw1Npe_YXUFEmJULhu0Df96s" target="_blank" rel="noreferrer noopener">Wyoming</a>, the first to legalize DAO LLCs — meaning traditional legal protections for LLC members were extended to any individuals that participated in DAO activities.



Delaware, too, has attracted attention from DAOs for its flexible LLC laws that would protect individual members of the DAO for being personally liable for any actions and obligations.



Brian Frye, a law professor at the University of Kentucky, told Blockworks that “Delaware is kind of the center of gravity of the corporate form in the United States, because Delaware as a jurisdiction figured out what was attractive to corporations.”



Even so, many organizations are still opting to incorporate overseas. Most recently, SushiDAO, the governing body of decentralized crypto exchange SushiSwap, made the decision to <a href="https://cms.blockworks.co/sushidao-seeks-shelter-in-cayman-islands-panama/" target="_blank" rel="noreferrer noopener">set up a new legal structure</a> in the Cayman Islands and Panama.&nbsp;



Neil Bhasin, a SushiDAO community member, <a href="https://forum.sushi.com/t/recommendation-for-sushi-legal-structure/11158/16" target="_blank" rel="noreferrer noopener">said</a> this decision was made because “Panamanian foundations are non-commercial in nature and do not have beneficial owners.”&nbsp;



Mike Selig, a crypto-focused attorney at law firm Willkie Farr and Gallagher, said that Wyoming’s DAO law does not take into account the uniqueness of DAOs — but has simply taken an existing LLC law and stamped the idea onto DAOs.



“Certainly a lot of these DAOs would prefer to be in the United States…but there’s not a legal wrapper that really works,” Selig told Blockworks. “What we need is a new type of legal entity that really is tailor fit for [DAOs]”



That’s not to say moving offshore is the best short-term solution, he said.



“The biggest downside in my view is that from a US perspective, [is that] courts and regulators will not respect these offshore corporate forms,” Selig said.



Frye said he, too, thinks DAOs need to take a more active role in pinning down and advocating for the needs that come with their unique structures.&nbsp;



“Until they figure that out, it’s not going to be clear how a jurisdiction is going to make itself attractive to them,” he said.&nbsp;



Added Frye: “People have started creating the organizational form — without necessarily knowing what they wanted to do yet…The older market structures are so familiar to us that it makes it really hard for us to see these new market structures for what they really are.”



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DAOs Favor Classic Tax Havens, Pass Up Crypto-friendly US States

David Canellis

<div id="highlights-block_6351a03e9bbcd" class="highlights">
 <ul>
 <li>Major energy consumers across Wyoming pay more for their energy to keep the total grid cost low</li>
 <li>This has made the state’s pro-crypto banking laws less appealing to bitcoin miners</li>
 </ul>
 
</div>



Wyoming lawmakers are reportedly set to mull special deregulated zones for large scale energy consumers such as bitcoin miners next week.&nbsp;



Two draft bills on the table would make room for a framework to provide cheap electricity to bitcoin miners (and other power-hungry facilities such as data centers), while protecting regular folk from price spikes due to surging usage, local outlet WyoFile <a href="https://wyofile.com/lawmakers-flirt-with-deregulated-zones-for-crypto-miners/">reported</a>.



One <a href="https://wyoleg.gov/InterimCommittee/2022/09-2022102723LSO-0050v0.5.pdf">bill</a>, focused on “industrial power zones,” would specifically award regulatory exemptions on power consumed in designated areas.&nbsp;



The <a href="https://wyoleg.gov/InterimCommittee/2022/09-2022102723LSO-0052v0.7.pdf">other</a>, “direct electric utility service agreements,” would instead seek to allow power companies to strike deals outside of existing pricing regulations — regardless of where in the state they operate.



Both bills are sponsored by Wyoming’s Joint Minerals, Business and Economic Development Interim Committee, a bipartisan <a href="https://ballotpedia.org/Joint_Minerals,_Business_and_Economic_Development_Committee,_Wyoming_State_Legislature">group</a> within the state legislature with ties to major players across Wyoming’s energy industry.



Wyoming has reportedly received a steady stream of requests from dozens of bitcoin miners eager to set up shop across the state. A series of pro-crypto <a href="https://cms.blockworks.co/legal-expert-avanti-may-face-uphill-battle-getting-fed-payment-access/">laws</a> related to banking and incorporation has spurred interest, but Wyoming’s halfway-cheap electricity hasn’t been enough to convince bitcoin <a href="https://cms.blockworks.co/crashing-prices-expose-bitcoin-mining-industrys-addiction-to-leverage/">mining outfits</a> to jump.



The <a href="https://www.eia.gov/electricity/state/">average retail price for electricity in Wyoming</a> is 8.27 cents per kilowatt hour, per the US Energy Information Administration, while the national US average is $10.59.



Such a difference results from significant consumers such as oil plants and strip mines actually paying higher rates than regular consumers, bringing down the overall shared cost of the whole Wyoming grid.



<h3>More bitcoin miners in Wyoming could bring higher state revenues</h3>



This shared-cost system, however, discourages energy-intensive operators, such as bitcoin miners, from moving to Wyoming.&nbsp;



The state also exports more than half of the energy it generates, according to WyoFile, and the draft bills up for discussion don’t specifically encourage creation of new power generation facilities.&nbsp;



Sen. Chris Rothfuss told reporters this has led to missed revenue from state coffers, as Wyoming earns taxes on every kilowatt hour consumed on the local grid — not on energy exported.



There are, though, concerns over whether Wyoming’s grid could handle an influx of bitcoin miners interested in taking advantage of potential deregulation. Texas&#8217; deregulated ecosystem struggled under pressure throughout the summer, and <a href="https://www.bloomberg.com/news/articles/2022-08-03/bitcoin-miner-made-millions-by-shutting-rigs-during-texas-heat">deals</a> with bitcoin miners were made to power down in times of peak demand.



The Wyoming Rural Electric Association, representing 14 energy co-ops in the state, reportedly opposes both bills. Not to mention, the largest regulated local utilities — one of which is already contracted with bitcoin mining outfit Bison Blockchain —- aren’t completely sold.



A similar measure discussed by lawmakers in the previous session, “deregulated industrial power zones,” ultimately failed.



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