Taxes and NFTs — the Important Questions with attorney Jacob MartinSep 27, 2021
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Diana Chen: Hey, everybody. Welcome back to The Unstoppable podcast. I'm your host, Diana Chen. And I'm here today with Jacob Martin. He is thenftattorney on Twitter and also in real life. Welcome, Jacob, thank you so much for being here today.
Jacob Martin: Hey, thanks for having me.
Host: Of course. So before we dive into the, the legal stuff, which is going to be the bulk of this podcast episode, give people a little context into your background so they know you're a real attorney and that way you have to say, also disclaimer, what you have to say is not legal advice. Jacob is an attorney. He's not your attorney. This is for informational purposes only. All right. Take it away, Jacob.
Jacob Martin: Yeah, you know, I've got it in my, in my Twitter bio, my LinkedIn bio, it's like I'm the only nft attorney, like maybe, like, that's just kind of a cheeky thing that I added a few, you know, six, seven months ago. But yeah, so my name is Jacob Martin. I'm an attorney here in Southern California. I live in Malibu. And actually while in law school, so back in like 2015, 2016, right before I started law school, is when crypto kind of got my attention. And then 2016, 2017, I interned at a law firm that did a lot of ICO paperwork here in Southern California. And so we were looped in with like Sheppard Mullin and Cooley, and some of the big firms doing paperwork. It was all chaos, but I loved it. And so I kind of personally felt like smart contracts would replace lawyers anyways. So I raised some venture funding, after like, at the end of my second year of law school, going into that summer, and I—yeah, I tried to build out a wills-and-trusts-like smart contract platform. So like probate documents; when you die, where does your stuff go? That's still needed. I mean, there's cost for Bitcoin and there's a couple of other things, but like, I think assets should go automatically. And I did, then I still do now. But yeah, so I've been, I've been doing basically like high utility smart contract stuff as either like a product person or CEO, kind of for the last three and a half, four years, really, or about—it was three and a half, four years ago. I did that for a couple years. And then 2020 was basically the worst year for me and for most people, right? So at the beginning of 2020, we shut down the startup after really hoping Wells Fargo would buy it. And then, you know, the short version of 2020 is, my wife's grandma died and then my dad died. And then a few months later, my daughter was born. So it was like a whirlwind of a year. But NFTs caught me in 2020, the way they were supposed to like, like clocked me right in the face. And I was like, oh my God, I love all of this. This is all of my favorite things at the same time. This is exactly what I thought smart contracts would do. They would just eat a whole industry. And so yeah, my, my wife gave him permission to treat my law firm like a startup. And I did my best to make sure that I knew as much as possible, if not as much as anyone else, or more in the industry about what are these NFTs, how do they work exactly, and how many people can I help here? So that's led me to where I'm at now. And I've worked with, you know, various Fortune 500s, a bunch of top artists, a bunch of my friends at this point, collectors, and people just across the NFT ecosystem kind of tangential as it kicks out my doubts now as well.
Host: That's awesome, yeah. And (inaudible) interest is definitely applicable to crypto as well. I think there's a lot of questions around, you know, what happens to your crypto and your NFTs and all of that when you pass? And I don't know that we have very good infrastructure and tools to help people prepare for that just yet. I think that's probably an area that, that needs some development.
Jacob Martin: Yeah, even, even with like, even with the new stuff, right? So like, that was, that was something I was trying to do a while back. And that was just like, like, you know, passing along your estate in general. But when you think of NFTs, it's even weirder, maybe weird is the right word, because what's happening now is like you own an NFT, well, an NFT doesn't per se have a value, right? Like you can, you can look at like a cool cat and say, well, other cool cats are worth this. So mine must be worth X. But when you're thinking of one-of-one art or like incredibly subjective items, you know, it's hard to really tell somebody what your portfolio's actually worth. It's like what you would accept is one thing, but what it's actually worth in the market is difficult, you know. And when people pass away, like there's taxes levied, if your estate is over a certain size, and we're not really prepared to be able to assess what someone's portfolio is actually worth. So well, we'll leave that nugget with people and they can cringe over that for a little while. But that's not, [laughter] that's not as much the current, you know, thing people are really thinking about.
Host: Yeah, I mean, some people definitely are in taxes and something—
Jacob Martin: Well, sure.
Host: —that you know, as we're wrapping up the year, which is crazy to say that, you know, we are coming up on the end of the year, people are thinking more and more about taxes, what they're going to do. So let's dive into that a little bit. To start off, I guess, just like, can you speak generally as to how taxes work with NFTs? Like when you buy an NFT when you sell an NFT, if you're holding an NFT over the course of a year, like how, how does, you know, the law see that, from a tax perspective?
Jacob Martin: Totally. So I feel like it's worth me giving the caveat that like, I'm not a tax attorney by trade, it's not what I do full time, but I've spent a lot of time this year—I feel like someone's saying I'm not a lawyer, but here's legal advice, right? Like, no, it's like, I spent a lot of time this year with other tax attorneys, other accountants trying to make sure we get this right so that I can speak on it. And the way, the way that it's viewed in general right now is, you know, the, the IRS and—has determined that if you swap Bitcoin for ETH, right, like, like a swap like a SushiSwap, a Uniswap, whatever, that's a taxable event. And they treat it as though you sold your Bitcoin at X price for USD and then bought ETH at X price. So if anyone wasn't sure yet, like a swap of crypto is, you know, considered a taxable event. And then if someone were to buy an NFT with ETH, right, so you spend one ETH on an NFT, well, the IRS doesn't really care what the price of ETH was, as in like, they don't think in terms of ETH. They think in terms of USD. So if you spent two grand, right, I guess, follow me on this roadmap, you spent two grand on an NFT, and that was one ETH at the time. And then you sell it for six ETH two months later, but he has gone up to 3600. They aren't thinking in terms of five ETH game, right? They're thinking in terms of USD. So at that point, the USD was 2k now it's 3,600 per ETH. So the USD is almost doubled. And then you, you gained from one ETH to six ETH, so there's like a quite large game there, right? So I don't know, it's six times through, you know. So let's call it like a 1,518—$15,000 gain, maybe. On that, like, that's where the tax would be assessed? Like, how much do you pay in taxes would be assessed based on that 15k or so gain? And, you know, there's, there's this designation in the UK of like, a digital asset, like they're a, they're a bit more progressive and more up to speed on crypto in general. But in the US, specifically, one of my counterparts who's helping me with this kind of tax, tax-related NFT project, we're putting together is, you know, it'll include like a big tax guide, and, and several other really useful things. He has been quoted in the infrastructure bill, that's before Congress right now, like, like eight or 10 times, and he's one of the crypto policy leaders in the country, maybe in the world, and he personally is pushing for designation of NFTs not, not as collectibles, right? They are not a collectible, the collectible would make it a 20% tax, right? And so, well, I guess I should clarify that. So if, if an NFT is deemed a collectible, like certain art is, then it would be 20% flat tax on things. However, if it's treated like it's crypto, right, like, I know more than one person who when they buy a crypto punk, they're saying this is a leveraged bet on ETH, right? They're just viewing it as crypto in a different form. All of that is up for debate. All of that is potentially disagreeable. But, you know, at present, the IRS literally hasn't made clear if they're going to give it collectible tax, which is 28% or if they're going to give it short-term, long-term capital gains tax, which would be significantly different. And so we're kind of putting together a guide, I'm like, if this then this, if this then that, right? And the other thing is, you know, for people creating and selling NFTs, that's going to have, you know, a personal income tax bracket. So, like, if you make and sell an NFT, you're going to get taxed as though you created and sold art or created and sold whatever. So that's a, a situation where you would really need someone to understand like, if they aren't setting up their own entity, right, so Artist A needs to probably set up their own LLC or their own S corp, right? Every situations a little different. Or else they may end up paying, you know, 50% plus in personal taxes when they could have probably run it through a different entity. I hope that's a helpful five-minute Crash course there.
Host: Yeah. So are you saying that for from the artists perspective, artists should form some sort of legal entity around their art instead of just selling art as themselves, the individual?
Jacob Martin: Yeah, very likely. I mean, this is, this is how the music world works. This is how like, the fine art world works. This is how, you know, kind of art generally works is, is it allows an artist to have an entity where the funds flow in. It allows the artists to spend money on materials on art, you know, on, on paint, on gas fees, on whatever, which that is, is another conversation too, I suppose. But like an artist might do—buy this NFT and I'll send you a physical print, right? Well, that prints going to cost them money. If they're running all of the income and the expenses through an entity, then that is likely going to be a better tax situation for the artist.
Host: Okay. Got you.
Jacob Martin: Yeah.
Host: And from the perspective of collectors, then is the taxable event only happens when somebody sells their NFT or does it happen when they buy one as well?
Jacob Martin: So taxable event on a buy would, would only occur if, like I said, to like, if it was like switching out Bitcoin for ETH or something and then they buy, well, then the Bitcoin for ETH would have been taxable. But if, if I take five ETH right now and I just go buy something, and you take five ETH right now and you go buy something, I don't see any world in which there's a taxable event on the purchase.
Host: Got it? And then long-term (inaudible).
Jacob Martin: Well, I guess so we can give it, we can give it—Oh, sorry. Sorry to cut you off. I would just, just to clarify, it's like when you buy a car right now, right, there's like a sales tax or something, right? But there's not any definable sales tax situation occurring right now with NFTs.
Host: Okay. Got you. And then, with long-term versus short-term capital gains then, if the, you know, the, regulators decide that NFTs are not collectibles, and that they should be taxed as crypto, long-term capital gains happen if you hold your NFT for over a year, is that right?
Jacob Martin: Yeah, yeah, 12 months and a day.
Host: Twelve months and a day, okay. Got it. So what is like the best way for people to start—to like, keep track of, you know, like, what they're buying and selling, assuming that they haven't, you know, they don't have like a spreadsheet of it yet. Like, I would have to go back in time, whenever I bought my NFTs and like, see what ETH was at, at the time and like, convert it like, how to payment? Where do I even start?
Jacob Martin: Yeah, so, so one thing that's going to end up kind of catching some people by surprise, I think is, if, if you bought ETH, especially for anyone who bought ETH either a long time ago or on like a different exchange, the ETH is going to be treated like pure profit, right? So start with the E. So like if you buy an NFT for one ETH, but it's ETH that no one had ever seen before, right, you pull it to the—there's ways to almost get into like, there's money laundering opportunities, obviously. So I don't want to recommend how to do those. But if you, if you haven't tracked your crypto prior to this year, there's a chance that like when you do actually take your crypto wallet, your Metamask, your, your Coinbase wallet, your—well, your non-custodial wallets, and you link them up with any of these tax softwares, you might find that you owe a relatively significant tax burden that's backward facing, right, like from last year, from two years ago, because you didn't pay taxes on it. I think that's actually probably going to catch more people by surprise than we expect. Personally, I think we're going to have a bit of a Black Friday for NFTs occur, as in I think a lot of NFTs are going to go on sale for very cheap, come tax season this year. But what you could do right now is you would log into any one of the five or six like relevant crypto tax software companies, right? So you've got companies like Tax Bit, and ZenLedger and Coin Tracking (sic) and CoinTracker and whatever, and they've all raised quite significant funding at this point in the last year or two, to build software just for this stuff, to track this stuff. So I think it's like by importing all of your crypto transactions into one of those wallets, you're then going to have to go audit your own wallet a bit to say, well, this transaction needs to be to manually input how much I spent, or manually input, what I bought, or how much he sold it for. Because so far, none of the software that I've seen is like, fully perfect. I'm actually in the process right now of auditing five or six software companies with a couple of accountants in a couple of other tax attorneys, just to make sure we, we know as much as we can and can make good recommendations to people. And then, you know, once you, once you've set up basically like, this is my wallet, this is my—this is what I'm doing with it. This is where I buy and sell, you should be able to start tracking and, and really figuring out the cost basis, the sell point, and most of these software companies will say here's your proposed tax burden. I think all of that is like are fully required by step 1, and then, you know, getting an accountant that's cryptoliterate is clearly step 2. Like I don't think anyone who's done more than $100,000 worth of transactions in crypto across multiple transactions should like attempt to do their own taxes. I think that's probably the break off point, in my opinion.
Host: Yeah, that makes sense. I know you're still in the process of auditing. But have you found any software tools that basically like you can just either connect your wallet or send your Ether scan link and they'll like, automatically pull your transactions?
Jacob Martin: Yeah. So several of them will do that. They'll do like the automatic pull of transactions. The thing that we're looking into the most right now, and are like really hoping to find answers on is not only who can pull the transactions, but who can like, identify, like pulling transactions from Ether scan is one thing. But then there's multiple other wallets, and there's other chains, right, and there's other things going on that are also NFTs, right? There Solana-based NFTs, there's whatever. So really, what we're hoping to find is that somebody or one or two software stand out as like, cross chain utility. Right now, we're not, we're not seeing anybody's website that is specifically catered to, hey, we are tax software X, and we're dedicating $10 million to the NFT side of things, and we're going to robustly build out XYZ, right? But it's part of my goal is to get tax software in as many hands as possible, even if it's like, only 7 out of 10 good, right? Because what I think is going to happen is we're going to have a lot of people not file their taxes at all, and then get audited in a couple years and be screwed. Or we're going to have people work with non-crypto literate CPAs and not use tax software and their CPAs are going to like quit their jobs, right? Or just fire them as clients. Be like, I literally can't do this because we're going to get audited. And then there's going to be a huge shuffle a huge scramble of 50,000 people all DMing me looking for an accountant because that's already like, I get asked five or 10 times a week. Hey, I've got this, can I get help? I've got this, can I get help? I'm like, well, yeah, I can recommend you to somebody, but good, I'm glad you're asking, like you do, you do need help.
Jacob Martin: And, and yeah, so that's, that's what I think is like step 1 is get it, get it hooked into one of these softwares and then put that in front of a crypto literate CPA and let them tell you where they see irregularities, you know?
Host: Yeah, yeah, for sure. Going back to a point you made earlier about gas fees, how is that taxed? So both when you buy an NFT, and you, you know, pay X amount of gas on it, and then also when you—
Jacob Martin: Yeah.
Host: —sell it, how—like, how is that all treated?
Jacob Martin: Yeah. So how it's taxed is quite clear, is, is the understanding that I've seen across like, various experts. How it's tracked is less clear. So because when you mint—when you're minting from a third party website, like not, not open to your (inaudible) someone's website directly, and then you're cranking up the gas, all of that, say you bought five NFTs and it costs you to ETH to buy and to ETH worth of gas, and it was like a flat 10 grand. Well, your cost basis is 10 grand, and that's simple. It doesn't matter that the NFT only cost five grand and the gas costs five grand, the system will just look at you made one 10-grand to purchase, right? But my understanding is several of the tax softwares are only registering the like three-ETH purchase, not the three ETH spent on gas, right, or two ETH on purchase, two ETH on gas. It's just, it's just triggering how much was spent on the purchase. So basically, I've got a couple of software's that actually are better than that, and that are showing, you know, the cost basis on minting this project is 10 grand it was four ETH total, instead of like a purchase amount, and then not having the gas amount. But I think that's probably a yellow flag people need to be looking at, is—yeah, is making sure that either Ether scan or whatever software they're using, like properly bakes in, you know, properly bakes in that, that cost of gas as part of the overall cost.
Host: Got it. Got it. Okay. So it's like if I buy an NFT for three ETH, but I bought it when gas was super high at like two ETH, so it's like five ETH total. And then I sell the NFT for four ETH which is technically more than what I bought it at three ETH—
Jacob Martin: Right.
Host: —that's counted as a loss on my end.
Jacob Martin: Yes, maybe because we would also have to add the layer of what was USD at when you bought it five ETH, and what was USD at—
Host: Right. Oh, right, right, right, right, right.
Jacob Martin: —when you sold at four ETH, right? That's the hard part. That's the part people forget about, is you notice with crypto punks, like, sometimes you'll see somebody buy one for like, a few weeks ago, somebody bought one for like 100 ETH. And they sold it for 80 ETH like three days later. People were like, oh my God, what an idiot. But ETH can actually run up hard enough during that period that it was a slight gain, I think. I think it was like a $5,000 gain or something and ETH had just taken a dump. So this person was trying to get out from under the crypto pump and they still didn't actually lose money even though they lost 20 ETH in the situation.
Host: Got it. Yeah, that makes sense. Yeah, that's a lot to keep track of.
Jacob Martin: Yeah, it's a lot to keep track of.
Host: So shifting over a little bit to the biggest topic in crypto law right now, which is securities. Everything's a security, we're not sure what's a security?
Jacob Martin: (Inaudible).
Host: Can you tell people like just from a—starting with a very basic level, like according to the law, what is the legal definition of a security?
Jacob Martin: Right. So the, the Howey Test is what you hear referenced by everyone, right? So basically, the definition of a security is buying a thing with expectation that that thing goes up in value due to something done by someone else. You know, more or less, that's the short version. So with NFTs, generally, they aren't securities, right? They're collectibles, most of them. They are art, or they are cool, or they are whatever, and they don't promise you any future utility, they don't promise you any future dividends or airdrops or revenue or anything. It's just a collectible. It's just a thing you buy like painting at Target, right? Some NFTs do offer you dividends and other things. So that's, that's a little different.
Host: Okay. So let's, let's break that down a little bit. First of all, you said that most NFTs are collectibles?
Jacob Martin: Yeah.
Host: I know, you know, I know, I know, there isn't guidance on this just yet. But I guess like, from your perspective, what are you thinking might not be a collectible? And be treated as like an investment vehicle or—yeah?
Jacob Martin: Yes, so, so working, working around a lot of the projects and working with a lot of people in the space, I'm not going to like describe something specific that could potentially like rug anybody. But I would say there's a, there's a fine line between buying an NFT that says buy this NFT and you will receive X yield, right? Like that's a public sale of a thing that people are buying an expectation of the yield, that's, that's tough. And then the fractionalization stuff, obviously, is going to be the biggest conversation with securities because, you know, the idea that you can buy a token that represents ownership of different NFT and your hope is that by doing nothing, somebody else comes in and buys the whole NFT from the group, right, there's this element there where it's like securitizing an item, potentially. And so yeah, that one's probably, it's probably one of the topics that I think is pushing the limits the most when it comes to potential securities arguments. Anyone who thinks that crypto punk because of security is silly, that's not—there's no argument there that we're not even for sale, they we're free. And then, you know, we saw the argument against Dapper Labs earlier this year, the top shots are securities. And that was also a dumb argument. Top shots are clearly not securities, but flow token was probably a security, that's why it's not for sale in the US. You know, kind of kind of simple clear-cut argument there as well.
Host: Okay. So it's more of the token part that can be considered a security, but if you're just selling art, if you're just selling cool cats, penguins all these like fun little things, none of those are considered securities, even if there's like language on the website that's like, you know, here's our roadmap at like when we hit for sale—
Jacob Martin: Right. So roadmap
Host: —with your airdrops, yeah.
Jacob Martin: Yeah, so roadmap is starting to get weird, airdrops are definitely going under scrutiny with the SEC, because it, it, it can be pretty clear that you're buying a thing because you're expecting the airdrop, right, or you're buying a thing because you're expected to yield or a dividend or whatever it may be. The, the simplest way I can put it and when I mention like fractionalization, or I mention like Flow token is think about both of those things as fungible, right? Like they're fungible tokens like Flow is a fungible token, ERC 20 token called XYZ that represents ownership in a specific NFT. That's a fungible ownership of a non-fungible thing. So fungibility is where the securities element comes in, because by you doing nothing, the whole fungible group can go up or down. Whereas with a non-fungible token, a singular piece of art, this piece of art on the wall behind me, you know, whether this artist has a good or, or bad career moving forward, it's not like this art is considered a security, it's just a scarce good, like it's an individualized good, not a fungible thing that is being traded on and going up or down in value based on the success of an underlying company or project or, or item. Also, for anyone listening, the SEC has not done enough analysis on any of this stuff. So please, don't call me and tell me that I'm stupid. Just tweet at me and you can call me stupid on Twitter. That's fine.
Host: [Laughter] Yeah, I know, I know, a lot of this is speculative still, because we just don't have enough guidance. I guess, like, from your perspective, what do you hope to happen next to, you know, that's going to protect collectors and artists and help us continue to enjoy NFTs in the way that we're enjoying them now? Is it you know, a big lawsuit? Is it like this, that, you know, we see regulation around NFTs are not securities, like, from your perspective, what is like the best thing that, that like we could see from regulators right now?
Jacob Martin: Well, with the amount of people that were supposedly served notice at mainnet this week for securities violations, I don't think we're going to get the clarity we want without some blood in the streets. So I won't say I want any lawsuits, but I don't think we're going to get clarity without the SEC utilizing a lawsuit as their opportunity to attempt to regulate, right, because Congress is really slow with regulation. And so sometimes governing bodies, whether that's like immigration stuff, or that's, you know, security stuff or IRS stuff, they'll basically utilize a lawsuit as their opportunity to like shoehorn in what they want to do, right? And so I do think that a potential lawsuit is on the horizon, a lawsuit or two, that will help with clarity around, around the NFTS, around securitization, around collectability. And, you know, I've worked on a couple of cases this year that, that have been private cases, I don't really do litigation, but when it comes to NFTs, there aren't a ton of litigators that know what NFTs are. So I've been a part of a couple cases where I've helped. And, you know, if those cases had gone to court, we would have some precedent right now, and you would know what those cases are, but they settled privately, because it's like the NFT and like crypto industry, I think does a decent job of keeping their dirt to themselves, right? So we've got some dirt that, that I know about, that several of us know about, maybe a lot of us know about, but it's not getting played out in court, which is probably a good thing to some degree, and it's a bad thing to some degree. But yeah, I think, I think the SEC is going to go after somebody and that'll give us some clarity. What I would like to see happen, you know, in my ideal world would be that we actually get, like relatively good guidance from the IRS, or like, good as in like clear, right? Like, if we can get the IRS to just like, actually listen to someone who knows what they're doing and work—maybe even work together with somebody, that would be a really great thing. I'm working with an, an tax attorney on some things, and he is helping the IRS with some things, it seems or at least he's got their ear and is explaining certain parts of NFTs and DAOs and whatnot. And so I don't know if there's a taskforce that's actually going to help us anytime soon. But hopefully, because there's no reason for NFTs to do $10 billion worth of revenue this year and not have any tax guidance from the IRS. It's kind of going to screw the IRS and us.
Host: Yeah, 100%. Until like, if a lawsuit does happen, what do you think is probably likely to happen, what would be ideal, I guess, for the NFT community? Would it be to go after a big player like Top Shot, for instance? And like, what would be the result in that case? Or would it be, you know, better to go after like a small player and kind of like keep it low key and just, just, you know, have something to establish this—these guidelines? What do you think?
Jacob Martin: That's a good question. I think, I think the idea of, like, let's stay with Top Shots, because they already you know, because, because Flow Dapper Labs has already served with that lawsuit. I mean, I read the, I read the complaint, the complaint wasn't any good. And the argument wasn't any good, but it would actually, even though it would cost Dapper Labs, probably a couple million dollars to deal with it. And I guess I don't know where that lawsuit is right now. It would likely be useful for the rest of us if they did go through that court process simply to help the United States courts help them write the opinion that says, Well, this Top Shot thing is clearly not an—it is clearly not security, right? This is a collectible digital basketball card. This is not a security because that would be kind of beautiful for all of us, I think because I keep getting asked probably every day. I mean, I had a call just before we got on this podcast that's, that's asking me about, is this a security? And I was like, "No, this is not a security," the thing they were describing. I was like, no, the thing you're describing is not a security. And they were like, well, I think we might want you to write like a formal legal opinion or like help us sign multiple formal legal opinions. And I'm like, wow, we're still shaking in our boots a little bit just because the SEC hasn't like specifically stated out loud, right, that these are not securities. So if it takes a lawsuit, that's fine, it doesn't really matter if it's a big guy or a little guy.
Host: Got it. Okay. Shifting gears a little bit. The other big topic I want to talk to you about is DAOs. I'm very bullish on DAOs. I'm in a few DAOs myself. But there's still a lot of uncertainty around the legal ramifications of DAOs, even for just, you know, ordinary members and contributors. So like in DAOs, you normally see you'll have, you know, the founders are like sort of like the council that it's, you know, makes the boats, you know, in the case of like a really large DAO with hundreds or thousands of members, or smaller DAOs where everybody is on knows to save voting on things. So what is, I guess, where should we start? Let's start with, you know, the DAO as an entity. Like, is it cool for people to just form DAOs without making it an LLC or a legal entity? Or is that like a bad idea across the board?
Jacob Martin: I think it DAO needs a thesis, right? A DAO needs a thesis and a general idea of how many members they want. And that's just where I think you start. I know, that's kind of like, almost sounds like it's sidestepping your question, but like, it really, it really matters, like, is this DAO forming to purchase one NFT? Or is this DAO forming to build a community, right? Or is this DAO forming to build a company? Like what is this DAO doing now? And what's the intent for later? I think those are the kind of the key questions to ask early on in approaching DAOs. And, you know, the, the entity formation of a DAO right at this point, we're talking solely in the United States jurisdiction, because I can't fully answer all of the ways in which you could or could not build a DAO in Mexico or Panama or Switzerland. But as far as the United States is concerned, a DAO without an entity, right, just a group of people who fund the multisig and then call it a DAO, that's going to be treated like a general partnership, right? The definition of a general partnership is a group of people doing a thing together for profit. That's what a DAO is. Sometimes DAOs are nonprofits in nature, and maybe there's another way to go about structuring those, and that's, that's where you get to the entity question again. But without the entity question, like, it's just like, okay, if we're forming a DAO, we're going to do something together for profit. Are we looking to have 10,000 members like with a voting stake, or are we looking to have, you know, 20 members with the voting stake. And I've been kind of fortunate enough to be working with, with Aaron Wright and the OpenLaw crew and Flamingo DAO on several DAOs recently, and, and I kind of, I kind of was, like, the key person on, on building a specific one not long ago called Ready Player DAO, we chat about that if there's time, and if you'd like. But basically, the getting-money-together in a group and saying, hey, we want to do this thing, that's totally cool. It's just once you've done that, you've got to really decide how to, okay, how do we structure it? Are we letting people in or letting people out? Are we, you know, going to go ahead and be a 99-member or less DAO which 99 people is above that, is where you break some kind of securities threshold, so you create like this investment-club thing that's more like a fund at that point, like a, like a massive, you know, almost like a mutual fund. And that's just incredibly different regulations. So you'll notice Flamingo DAO and several others are very clearly going to have a 99-member cap, and they're not at 99 members yet, but they won't go above 99. So our Ready Player DAO, we're doing the same thing with structurally. And, you know, the entity itself, the LLC, is it's there for, for basically, you know, when I mentioned general partnership, the only problem with a general partnership is it means that if you ever get sued, like if the DAO were to get sued, then everyone is potentially equally liable, like personally liable. Not like, oh, well, our DAO got sued, so now our DAO owes money. It's like, no, no, no, our DAO got sued, all of us might owe money, because there's no entity to protect us. So I say think of a DAO with an LLC, as basically playing a video game and having a plus one life. And if somehow you like actually eff up, or you get sued in the ground, or you have a problem, the worst thing they can do is take all the money in the DAO, okay, the LLC, all the money in the wallet, and basically put the wallet and the company out of business, but they can't even come sue any of you personally for any extra money. And that's a, that's a really, really key protection, obviously.
Host: Yeah, and sort of the backup a little bit, I've actually talked to quite a few people who, you know, don't come from legal backgrounds and are—can't do—they don't even know, you know, like what sorts of things could come up in a DAO, where, you know, either somebody would sue someone or when the DAO would get sued. Do you have any examples like from real-life like obviously without saying names or anything about, like—
Jacob Martin: Totally.
Host: —things that have gone wrong in DAO?
Jacob Martin: Totally. So I think, well, really actually so early that we haven't seen a good example of this yet. I want to say, and maybe you'll remember better than I do. Was it like two months ago? Didn't Yearn and Curve finance have an issue? Somebody's source code was copied? Do you remember what I'm talking about?
Host: I vaguely remember that—
Jacob Martin: There was some like—
Host: —but I don't know the details.
Jacob Martin: There was some like massive, there was some like massive, defied DAO, who basically had their source code like copied and then utilized. And they had this big thing, and it was on Twitter, they were trying to figure out like, hey, can we as a DAO protect our IP, which is this copyrighted code? Can we stop other people from copying and utilizing our IP however they want? I saw people pushing to sue other people pushing not to sue and, you know, screaming this is, this is crypto, like this is open source, whatever. I don't know what the final outcome there was, or if there was a final outcome. But essentially, you know, we haven't seen any DAOs that I know of formalized or informalized DAOs get sued yet. So that's why I say a DAO without an entity is likely going to be treated, right, likely going to be treated as a general partnership because I don't think we've seen one yet that has gone to court in any way. But, you know, to play the, the theory game, imagine 10 of you are on a multisig or 1,000 of you are on a multisig, and you screw something up and your DAO deserves to get sued, right? You don't pay a contractor, you don't do something. Well, what they would try to do, I guess is go after one member that they can find here in the US, sue them personally, and then in court try to join, like join there is the word, right? So try to bring in and I know you're a lawyer, but this is for everyone else, right? A former lawyer, sorry, you're a former lawyer. I don't want to put you in that, that camp of lawyers.
Host: Yeah, don't, don't, don't come at me, don't tweet me your legal questions; I don't want any of that.
Jacob Martin: I don't want I don't want to lawyer you up. And, yeah, so, so you could sue one person in the DAO, attempt to join her in the other like 99 unknown members, the other 1000 Unknown members, and then that one person that you sued and brought to court, they would definitely beg their buddies to join them in court, right? They are like, guys, please come to Court with me. Help, helped me defend this. But they may or may not be able to reach those people and they might can just sue that one individual person for everything and win. Like, hey, you're a known member of DAO XYZ, you didn't pay this $1 million contract, you have to pay this $1 million contract. And they can go to the rest of the DAO and beg the DAO to help them cover the million dollars, but there's probably nothing that can force that DAO to do it because it's just an informal group of people and it's either going to be good vibes or bad vibes. And that person is going to be kind of screwed or not screwed, right? So this is why the LLC just makes way too much sense because that risk is pretty intense for people joining; that they might get personally get stuck with a million dollar tab, or a 10 or $100 million tab. So yeah, I hope, I hope that makes sense.
Host: And just to clarify, the people that—the liability we're talking about here, does that apply to anybody who is like a so called member of a DAO or a contributor, or does that only apply to people who are, you know, voting on Gnosis Safe or who have put money into the DAO? Like, what is the cutoff for that? Because, you know, like, so many people are like fringe members in like, so many DAOs—
Jacob Martin: Right. Right.
Host: —and they're only active contributors in like maybe one or two. So are they—do they have liability risk? And all those DAOs at their fringe members in or only the ones that they, you know, have money in or are voting on Gnosis or like where's the line?
Jacob Martin: Yeah, I think, I think it's probably important for me to clarify or, or add that DAOs are a very loosely used term right now, like the word "DAO" is used probably way more often than it should be, in the sense that if you've just got like this utility token floating out there, and anybody can buy X number of tokens, and then they are a member of the DAO, or you own a certain NFT and so you get airdropped tokens that make you a member of that DAO. A lot of those DAOs that we're—that I'm referencing, there aren't legally formed entities. And the members that are buying these tokens have never signed any paperwork, right? They're not members of an LLC, or of any kind of protected anything. So there's potentially going to be some really awkward lawsuits that put some people, like that really screw some people that didn't see it coming. Because they're going to be like, oh, well, I didn't know, I didn't know that I was wrong to do X, right? Or I didn't know that I couldn't—by buying into this one DAO and then like some other people who kind of run the DAO, I just have tokens in my wallet, they did some terrible stuff that I didn't know about, I didn't agree with, I shouldn't be able to get sued for that, right, I shouldn't be able to get in trouble for that. And if the Court decides that, it doesn't matter what you think, then the Court's just going to say screw you anyways, right? And so the law has this like, just because you were ignorant to a law doesn't mean that you aren't held to the standard of the law. I think there's going to be some really interesting DAO litigation with people who join a thing because their friends said buy these tokens, join me on this club, join me in this group, like let's go to this, this together. And they're not really like, sure, like, am I a member of this thing? You know, am I liable for this, this thing? Also, some of these DAO membership tokens are definitely just being bought and sold, like treated like securities, right? Like going up and down in value, people are buying and selling them to make money, which if somebody says, I only buy these tokens, so it left me in the club. And somebody else says, I only buy these tokens, so they'll pump my bags, that's not a great look either. So I couldn't have had this conversation with you six months ago, and I don't think DAOs were ready for this conversation six months ago, right? But I think where we're at now is like, calm before the storm, where I'm a part of a DAO, I'm a part of a couple of DAOs. I'm talking to a bunch of DAOs or potential DAOs. And at some point, there's going to be billions and billions of dollars generated by these small groups utilizing a structure called a DAO, or loosely calling themselves a DAO and not utilizing any structure. And the government's only going to let that happen without clarity for so long, right? What do you think? Like, I'd love to know your opinion on this because you're—as someone in multiple DAOs and with kind of the legal background, like, do you like agree with what I'm saying? Are you seeing it a little different? Yeah, what do you think?
Host: I think you're probably right. Like without actually, you know, having studied like, the legal implications, which I guess like, we just don't know right now. But yeah, I mean, I'm definitely like, scared about what's going to happen, like, I'm doing it anyway. But I'm also like, yeah—
Jacob Martin: Right. Right.
Host: —I could be like, totally aft in the future. Yeah, I, I think—
Jacob Martin: I think it's a good, I think it's a good reminder to just like, pull, pull some profits off the table along the way, right? Like, I don't mean like, go find a financial advisor and get a 401k and like, dump a bunch of money into some random safety net. Like, that's, that's not what I'm, I'm saying. But like, every now and then, when a bull run occurs, whether it's X token or ETH, or any of the things, it just isn't a bad idea to say, you know, what, actually, I'm going to go take a little bit off the table right now, because, you know, I might need to pay taxes, and these taxes might really screw me, right? Or I might, I might get in a situation where this DAO I'm in, or one of these 10 DAOs I'm in actually gets sued, right, or gets, you know, plowed into the ground through a lawsuit, or I'm now personally liable for X amount of stuff. I don't think people should live scared. But also don't think people should live stupid, right? So if you're worth, if you're worth 200 grand on paper, or 200 million on paper, it just doesn't suck to pull 10%, 20% every now and then into the safety net account for just in case, right?
Host: Yeah. It just hurts knowing like sitting in like a normal savings account. You're just basically losing money, when you could be investing in crypto, but you know—
Jacob Martin: Yeah, I know.
Host: So like for—
Jacob Martin: It does hurt. I totally agree.
Host: —for people. Yeah. And I think like the, the rule of thumb really is to like, go out and do the things but be smart about it. Be careful about it, like don't be so scared that you're not going to participate in this ecosystem at all. So like, from a more practical perspective, this is your advice to people out there. What does that look like in real life? Like if somebody is deciding whether or not to join a DAO, what questions should they be asking themselves and making sure they know before, you know, in order to help them decide, like, should I join this DAO or not?
Jacob Martin: Yeah, I think I think you have to start with like, how participatory do I want to be in the DAO? How participatory can I be in the DAO? And then, you know, what's the thesis or the ethos off of the DAO. And if, if those two checkboxes are met, and you're like, okay, I can and do want to be participatory in the style, I can and do agree with the thesis ethos, whatever, I want to do this thing with these people, I can meet the minimum, if there's a minimum, or however you want to do it, from there, it's really just like, okay, are we going to let anonymous people into our DAO, right? Like anons and pseudonyms are great, and I'm friends with many of them. But you can't mingle your money with an unknown person in the US, right? Like, that's just not really allowed. So it's kind of like this big awkward moment where it's like, oh, well, I really like so and so, but actually don't know their details. You know, the way, the way that OpenLaw working Flamingo DAO and now spinning up several other DAOs, the way they do it is OpenLaw team basically is a group of lawyers and operators, and they will KYC people, they didn't have (inaudible) but they didn't fully KYC, but they do the legal requirements and end up with personal information and tax paperwork on every individual that joins a DAO that's associated with, with OpenLaw. And that's really the only way to utilize the LLC protection. As of now it seems to have the, the 99 or less members and be KYC. Anything above that, you'll notice there's, there's news the two there, come out coming out that friends of benefits is going to utilize a C corp structure, right C corp with a DAO, they're the first to pioneer it. You know, they're utilizing some investor money, some really interesting lawyers, so really smart crew, and yeah, we'll see what happens. But a C corp can obviously have as many members as they want. They're just totally pioneering what it means to buy a token, to be an owner member to be involved in this C corp structure, and try to not call it a share or a stock, right?
Jacob Martin: And it's fair to say that, like, these guys are some of the most innovative people in the space. And what they've built is really quite interesting, but also is on the bleeding edge of innovation, which makes them one of the most likely people to potentially get sued, right, or to go to court. Not sued, because hey, you guys are criminals, we're going to find you and put you in jail, but sued as in like, hey, that structure isn't allowed here, or we don't understand that structure come explain it, right? So hopefully, friends of benefits with some counsel, with some investors are able to really put together, you know, a solid argument. And if, if and when they're good to go, they will definitely have set a precedent that a lot of people are about to follow, not just for a gated discord, but just for entities and corporate building in general. I mean, you know, how many people I know that work at Reddit, Apple, Google, Microsoft, etc., that would rather leave, take half a million dollars, put it on the table and be a co-owner and the thing they're building? All of them, right? Like, instead, they usually get hired as a 2% member of a young startup. It's like, no, no, we're all 2% owners. We're all putting 50k on the table, let's build a thing. That's really sexy, you know?
Host: Yeah, yeah. And I think that's probably the biggest draw of like, why so many people joined DAOs.
Jacob Martin: Totally.
Host: All right. Cool. I've got two more things to talk to you about. These are non-legal things, fun things. Do you have time, by the way?
Jacob Martin: Do it? Yeah, yeah, yeah.
Host: Okay. Cool. So first thing is you brought it up earlier, Ready Player, Ready Player DAO—Ready Player—
Jacob Martin: Yeah, yeah, yeah.
Host: Ready Player DAO, that's one of your projects that you were involved in. Tell people what that is and like how, you know, people can participate if they're interested.
Jacob Martin: Yeah, so it's called—Twitter's ReadyPlayerDAO, all one word. Spin up Ready Player One obviously. Basically played around gaming, I think is going to be probably a trillion dollar industry maybe you know, multi hundred billion dollar industry on the low end when your account for in-game skins, in-game NFTs, in-game yield off of SLP like with Axie or other things. It's just a beautiful cross between DeFi gaming and we all love the DeFi gaming. So Ready Player DAO, I kind of got annoyed that I didn't know enough about Axie in June this year, like I had seen, Oh, Shiny and Fuck Render and some of my other friends with Axies in their profile for like months like Axies it's probably January earlier. And so finally, I wanted to have a meeting with someone who ran some Axie teams, he has managed some, some scholars in, in the Philippines, in the Suela. And I invited five of my real life friends, five of my Internet friends, and we had a group call. And my real-life friends were like, yeah, we might, can put 5k into this. Then my Internet friends were like, we're in for 25 ETH each. And so we're like, okay, who else should we bring on? And we invited a few other people. GMoney's [phonetic] a friend of mine. He showed up. He's like, oh, I—I'm in. I'll put, you know, a larger number on the table. And then yeah, so, so Flamingo DAO, the LAO and several of these other members, really, we have a really fun crew spread across, you know, people that are worth billions of dollars. And then like my assistant, and he's my homie and my operations manager, but like, he wouldn't normally be joining a DAO with several billionaires, right? I wouldn't either. But we, we were point people who were instrumental in doing it. So shout out 0xKilroy on Twitter. That's my guy. Yeah, so we pulled it together. And basically original thesis was Axie is yielding really serious returns, like 100% ROI on ROI money in a hundred days or less. And that's just absurd, right? You can't just double your money in a hundred days. But we, we will—we became bullish on Axie and then taking some Gambles in other games that are emerging and then getting ready to write seed checks in some of these other emerging companies. So that's kind of the three things the DAO does is Axie right now, while we're waiting on other games to have fully-fleshed out platter in mechanics, taking small bets on new games, buying land, buying in-game assets, getting access, and then getting ready to write seed checks basically, in some of these up and coming companies and games. We originally ended up pulling together like 1500 ETH, across like 36 people, 38 people. You know, everybody's signed legal paperwork, everybody's in the crew. We have a, we have an LLC under the DAO. And right now, our intention is probably—we will be raising soon. We've got a couple of really, really dope VCs and friends that, you know, high places, I guess, that are interested. If anyone is like, hella interested in listens to this, and they're like, Oh, my God, let me in. Like, you can send me a DM or something, and we'll, we'll, we'll let we'll let you know when we're like raising and stuff where we're trying to figure that out right now. And then, yeah, like, hopefully, our, our goal, I think, at this point, our goal is, you know, there's a path to token, right? So taking a DAO from being a small private DAO to token has not yet happened, realistically. There's usually a small DAO with an ERC20 token internally, and then they publicly sell some later. We literally don't have an ERC 20. We have membership units in an LLC, and we have a DAP where we can go vote, right, based on how much of a vote we have. And so we will likely add a token someday. And there's probably not enough there for me to explain that I actually can, can put out there. But that's the, that's the idea.
Host: Nice, nice. Well, definitely—
Jacob Martin: You can join.
Host: —I'll keep my eye on—
Jacob Martin: You can join if you want.
Host: Amazing. I'll slide into your DMS after this.
Jacob Martin: Do it.
Host: And then the other thing I wanted to talk to you about real quick is you're working on your own NFT project, and it's a tax NFT project. Can you talk about that yet. I know. You've like teased it on Twitter and stuff.
Jacob Martin: Yeah. When is this podcast going live?
https://unstoppabledomains.com/blog/web3-101-part-iv-what-are-cryptocurrencies-forHost: Probably like Monday.
Jacob Martin: Okay. Yeah. No, that's fine.
Host: That's it.
Jacob Martin: No, that's fine.
Jacob Martin: The high level is I'm basically I'm going to do 50,000 NFTs, which is a lot. But what we're going to have is—just a couple of bullet points, is we're going to—I'm working with two tax attorneys, an international tax attorney, a domestic tax attorney and two accountants that have all been in crypto for five plus years and all been dealing with IRS audits. We're putting together probably—it's probably going to end up being almost a 10-page or a PDF, that's going to be the definitive tax guide on NFTs defined crypto, you know, in general. And in the part that I'm hoping to get right is I've been auditing these tax softwares, because I'm hoping to partner with the right software or software companies, multiple maybe, to give away like a one-year free subscription to wanna-be software companies. So the NFT, it'll have its own visual representation, then the unlockable PDF, then hopefully a one-year subscription kind of baked into one of the software companies. I can't give any more than that.
Host: Okay. Okay. Don't have a launch date yet?
Jacob Martin: October 26.
Host: Okay. October 26.
Jacob Martin: Yeah.
Host: And then is there a website or where do people go to meet?
Jacob Martin: Not yet, nothing.
Host: Got it. Okay.
Jacob Martin: We can't do anything yet. You can't do anything yet.
Host: All right, you just got to follow Jacob on Twitter so that—
Jacob Martin: Oh my goodness.
Host: —you stay apprised on that [Laughter].
Jacob Martin: Something like that, yeah.
Host: I'm pumped, I am pumped for that. I mean, there's just like, no resources like that out there yet. So I think this is going to be huge.
Jacob Martin: Right.
Jacob Martin: Obviously.
Host: It will. It will, I'm sure. All right. Awesome. Thank you so much, Jacob for taking the time. I know we've gone overtime, so I apologize for that. Before you go, last thing, just tell people where they can find you on, on Twitter; what your handle is.
Jacob Martin: Yeah, totally, totally.
Host: And then if there's anything else you want to plug as well, go for it.
Jacob Martin: Yeah. So my Twitter handle is @thenftattorney. There are other people who do NFTs and law. It's fine. It's not just me, but it's the Twitter handle. And then my website is www.jtmtechlaw.com. And you'll know you're in the right spot if you see a crypto punk on a lawyer's website. That's what that looks like.
Host: Absolutely. Awesome. Thank you so much, Jacob, again. Thank you, everybody, for tuning in and we will be back again soon with another episode of The Unstoppable podcast.
Jacob Martin: Thanks.