A Delaware C-corp, a key developer for a global DAO, minted 50 million tokens, bypassing an intended offshore structure. This single action, a simple technical procedure, potentially created a $10.5 million phantom income tax bill in the United States. This scenario highlights a massive blind spot for many decentralized organizations.

Under IRS rules, when a U.S. entity creates income-generating assets, the IRS treats that income as U.S.-sourced, even if the DAO operates globally. Dev Labs thought they were just handing a technical task. The IRS saw it as creating $50 million in taxable property. Understanding what happened with Dev Labs requires stepping back to how DAOs should work, and where that theory collides with tax reality. 

Web3 was built on the promise of borderless collaboration. This next evolution of the internet uses blockchain networks to create systems that are verifiable, trustless, and self-governing. It is the technological foundation for new forms of organization.

Decentralized Autonomous Organizations, or DAOs, are a direct product of this shift. They utilize smart contracts on a blockchain to manage projects, treasuries, and governance globally. But tax authorities do not operate on the blockchain. They operate in specific jurisdictions with long-established rules about who owes them money.

This post breaks down how multi-entity DAO partnerships can accidentally create a U.S. tax presence. We will examine how simple operational mistakes can lead to significant liabilities and explore the steps you can take to prevent them.

What You’ll Learn

This post explains how multi-entity DAO structures can unintentionally establish U.S. tax presence through shared control, token issuance, and governance overlap. Using the DecentralizedSweepSpace case, we’ll show how a single misstep can trigger corporate income tax, CFC exposure, and multi-jurisdictional reporting obligations.

Web3, DAOs, and the Tax Reality

Web3 operates on blockchain networks where ownership and governance are built into code, not paperwork. DAOs take this model further, bringing people together across borders without the usual corporate hierarchy. But while code may be borderless, tax law isn’t. If a U.S.-based team develops the protocol, mints tokens, or controls governance keys, those activities can tie the entire DAO back to U.S. jurisdiction.

The Dev Labs Case: When Token Minting Creates Nexus

The DecentralizedSweepSpace DAO was structured across four entities:

By minting 50 million tokens itself, rather than having the unformed BVI issuer do so, it created a direct U.S. economic connection. The tokens’ $50 million fully diluted valuation meant Dev Labs could face phantom income tax at 21 percent, or roughly $10.5 million, under IRS Notice 2014-21.

The Tax Triggers

1. Economic Nexus through U.S. Activity
   Token creation by a U.S. entity ties the income-generating event to U.S. jurisdiction. Even if the DAO’s governance and treasury are offshore, the IRS can treat the minting as U.S.-sourced income.
   
2. CFC Exposure through Control
   If U.S. persons hold more than 50 percent of the vote or value in foreign affiliates, those entities become Controlled Foreign Corporations under IRC §957. In the DecentralizedSweepSpace structure, U.S. developers held token warrants and governance rights that could confer de facto control, triggering Subpart F and GILTI inclusion.
   
3. Compensation and Phantom Income
   Team members received token warrants with two-year vesting schedules. Under IRC §83, these grants can be treated as compensation, creating taxable income even before liquidity.
   
4. Reporting and BOIR Obligations
   Dev Labs’ U.S. incorporation triggered Beneficial Ownership Information Reporting (BOIR) under the Corporate Transparency Act. The BVI and Costa Rican entities faced parallel reporting under their own regimes.
   

How Shared Governance Creates Tax Exposure

The DAO’s governance and treasury functions were managed through multisig wallets controlled by the BVI Business Company. But Dev Labs retained administrative keys and deployed smart contracts from the U.S. That overlap blurred the line between foreign and domestic control.

Under IRC §482, the IRS can reallocate income between related entities if services or assets are transferred below fair market value. In this case, Dev Labs’ development work and token minting could be considered underpriced services to a foreign affiliate, resulting in additional taxable income.

Transfer Pricing and Development Agreements: The Missing Piece

Most DAO structures ignore transfer pricing documentation, treating development work as informal contributions (sweat equity) rather than commercial transactions. This creates substantial exposure under IRC  §482, which allows the IRS to reallocate income between related entities when transactions occur below fair market value. 

When Dev Labs created smart contracts, managed developments, and provided ongoing technical support, those were valuable services that should have been priced at market rates. Development agreements between U.S. entities and foreign affiliates should employ arm’s-length pricing, rather than treating the work as informal contributions to a common cause. 

We recommend documenting all cross-border service arrangements with formal agreements that:

• Define the scope of development services and ongoing maintenance
• Set the market-rate compensation for technical work. 
• State clear IP ownership and licensing terms
• Benchmark regularly against comparable transactions. 

Without proper transfer pricing documentation, the entire foreign structure faces potential audit scrutiny and income reallocation. The IRS can effectively collapse the arrangement, treating all income as U.S.-sourced, regardless of the formal entity structure.

Lessons for DAO Founders and Developers

• Define Roles Before Launch: Clearly define which entity is responsible for development, token issuance, and governance.
• Document Ownership and Control: Track who holds warrants, voting rights, and smart contract keys.
• Coordinate Reporting: File BOIR reports in all relevant jurisdictions to avoid penalties.
• Price Intercompany Transfers: Apply arm’s-length principles to token allocations and IP transfers.
• Engage Cross-Border Counsel Early: A coordinated legal strategy can prevent CFC classification and double taxation.

Structure Is Not a Suggestion

The decentralized world moves at breakneck speed, and tax law is struggling to keep pace. The IRS is applying the same economic nexus and corporate control rules from decades ago to DAOs, token distributions, and DeFi protocols. Setting up entities in multiple countries doesn’t protect you if those entities aren’t actually operating independently.

The story of Dev Labs shows that one entity can have far-reaching consequences for the entire network. A token minting, a transfer of IP, or even a governance vote can pull your entire global operation into the U.S. tax net. Proper planning is not an optional extra; it is the foundation for sustainable growth. 

Building a compliant, tax-efficient DAO structure from the start is far easier than trying to fix one after the fact. If your organization operates across borders, a careful review of your operational flows and decentralized governance mechanisms is essential.

At Allegis Law, we design and implement legal frameworks for complex digital asset projects. If you are building a DAO and want to ensure your structure is sound, schedule a consultation with us.

Disclaimer: This post is for informational purposes only and does not constitute legal advice.