MakerDAO is one of the oldest and most trusted DeFi protocols and at the heart of the DeFi movement. The Maker protocol underpins more than 400 other DeFi protocols that let investors borrow DAI. We’ve got everything you need to know about MakerDAO, DAI, MKR tokens and how it all works - as well as what the tax office will want to know about your Maker investments.
MakerDAO is a decentralized autonomous organization (also occasionally known as a decentralized autonomous corporation).
A DAO is an organization that's designed to be automated by smart contracts and decentralized by existing outside of a single government or corporations, instead it's controlled by organization members, which can be anyone who wants to invest.
MakerDAO and the Maker protocol was founded by Rune Christensen and a group of devs in 2015. The idea of the protocol was to allow investors to use their crypto assets as collateral to borrow DAI.
The protocol and organization has developed far beyond this initial scope now. But originally the purpose of the Maker protocol was as simple as any investor with a Web3 wallet - like Metamask - could deposit ETH into the Maker protocol and borrow DAI.
Nowadays, the Maker protocol is a core layer of the Ethereum DeFi ecosystem - supporting many other protocols.
DAI is a stablecoin cryptocurrency. Stablecoins 'peg' their value to another asset, like fiat currency or precious metals. In this instance, DAI is 'pegged' to the value of 1 USD, so 1 DAI = $1.
DAI is minted through the Maker CPD (collateralized debt position) smart contract that automates overcollateralized loans. Overcollateralized means you'll deposit more crypto as collateral than you'll borrow. This is to reduce the risk of liquidation due to the volatile prices of underlying assets.
Once you’ve got your DAI, you can do a huge variety of things with it using other DeFi protocols, for example, lend or stake your DAI to earn more DAI.
As well as DAI, MakerDAO has another native token - MKR. The MKR token is a utility and governance token. MKR holders can vote on various aspects of MakerDAO - like developers, road maps and proposals.
You can buy MKR tokens through a huge variety of crypto exchanges - both centralized and decentralized. Similarly, you can also hodl and sell MKR tokens, as well as stake them to earn.
At the time of writing, MKR is valued at $1,762 - so it’s no small sum!
So now we know the Maker protocol essentially mints DAI in exchange for loaning crypto - letting investors use DAI for a variety of other investments. Simple.
So where does Oasis.app fit into it all?
Oasis is the front end access to the Maker protocol - so it’s the part investors actually interact with. There have been various versions of Oasis throughout the years including OasisDEX, Oasis Trade and finally Oasis.app.
To use the Maker protocol, all you need to do is head over to oasis.app and connect your wallet. Oasis.app supports:
Once you’ve connected your wallet - you can use any of the Oasis products available.
There are three main investment options on the Oasis.app:
The Maker vault is a core component of the Maker protocol. It's where you deposit your crypto collateral to create DAI. At the moment, you can deposit the following cryptocurrencies to the Maker vault:
As well as this, you can also deposit multiple Uniswap liquidity pool tokens, for example DAI-ETH LP tokens or WBTC-ETH LP tokens.
Once you’ve added your collateral, you’ll be able to use both the borrow and multiply products on Oasis. Let’s take a quick look at both.
Once you've deposited the crypto you wish to use as collateral to your Maker vault - just pick a borrow product. For each asset, there's normally a variety of borrowing products available - each with a different minimum collateral ratio and variable annual fee.
Oasis multiply lets users utilize their deposited collateral to both borrow DAI and create multiplied positions, all from one single spot. Multiplied positions are similar to leveraged or margin positions - but you don't need to borrow funds from another party to open a position. Instead it’s all automated by smart contracts.
So where you could have previously deposited ETH, borrowed DAI, then used that DAI to buy more ETH - the multiply product automates all this process for you into one simple step.
Like with borrow - you just need to pick the asset and your multiply product. Each multiply product has a different maximum multiple and variable annual fee.
DeFi taxes - including Maker taxes - are complicated.
There's two main reasons for this. Firstly, the IRS and other tax offices globally haven't released any specific DeFi guidance just yet - and where they have like HMRC, it's just led to further confusion.
As well as this, each DeFi protocol works slightly differently. As it's specific transactions that create a taxable event - we need to look at how each specific protocol works to figure out the likely taxation.
Yes. You'll need to pay tax relating to your Maker investments.
Crypto is subject to either Income Tax or Capital Gains Tax - it all depends on the specific transaction you're making. Let's take a look at how different transactions in Maker and the tax implications of each.
We’ll start with the obvious - the IRS hasn’t issued any clear guidance on the tax implications of crypto used as collateral. So it all comes down to how your specific DeFi protocol works as to the potential tax consequences.
When you deposit your chosen crypto as collateral into a Maker vault - unlike with many other DeFi protocols, you won’t get a token back representing your asset.
Instead, when you borrow DAI (or another asset if you’re using a multiply vault) it’s held in escrow by the Maker protocol.
What all this means from a tax perspective is that it’s likely depositing your crypto to a Maker vault cannot be considered a taxable event. You’re not earning new crypto coins or tokens so it can’t be subject to Income Tax and you’re not selling, trading or spending your crypto, so it can’t be subject to Capital Gains Tax.
When you borrow DAI using the Maker protocol - your collateral is held in escrow and you receive new DAI tokens proportionally to the amount of collateral you put up at the agreed collateralization ratio.
Again, from a tax perspective - this is foggy at best. You’re not selling your collateral or trading it in exchange for DAI, so it can’t be viewed as a Capital Gains Tax disposition. You’re also not making an income through a particular activity - for example mined crypto or staking rewards, so it can’t be viewed as income and subject to Income Tax.
With this in mind, it’s likely that when you receive DAI, this is a tax free event.
You'll pay a few fees when using the Maker protocol including gas fees for transactions and a variable-rate stability fee.
The IRS and other tax offices haven't released any guidance around crypto fees and whether they're tax deductible.
When it comes to stability fees, we can think of these as a kind of interest expense. However, whether that interest expense is tax deductible will come down to how you're using your loaned crypto, for example:
Gas fees are equally complicated. If you’re paying a gas fee related to buying, selling or trading crypto, then you can add this to your cost basis. However with Maker, your gas fees are related to moving your crypto to a vault - which is more akin to a transfer. It’s not clear whether transfer fees would be tax deductible. We recommend a conservative approach where you treat transfer fees as disposals to avoid any unwelcome audits from the IRS.
When you create a multiplied position using Maker - though it’s a couple of simple clicks for you, a lot goes on in the background, automated by smart contracts. Multiplied positions work similarly to the borrow vaults.
So you’re depositing your asset and receiving a specific crypto in return. However, in the background you’re actually borrowing DAI still, and using that DAI to purchase more crypto. Lots of investors were using their loaned DAI to make purchases of other crypto assets anyway - this product just simplifies that process for them.
From a tax perspective - it’s not clear. Though there may be a trade of crypto going on in the background - via the smart contract - on the user’s end, it works very similarly to taking out a standard DAI loan on Maker, which would likely not be subject to tax.
If your collateral drops below the required collateral ratio (usually around 1.5X), the Maker protocol automatically liquidates enough of your collateral to return to the correct ratio. You'll also pay a penalty.
Liquidation is seen as a kind of disposal - like selling, trading or spending your crypto - so it's subject to Capital Gains Tax.
To calculate whether you'll pay tax on your liquidated crypto, you need to subtract your cost basis (the price of your asset at the time you acquired it and any transaction fees) from the price of the crypto at the point it was liquidated. If the price of your crypto has increased - you'll pay Capital Gains Tax on that profit. So even though you're technically making a loss through liquidation, you'll still pay Capital Gains Tax if you have a profit.
As for penalty fees - the IRS doesn't have clear guidance on this. They can be viewed as similar to 'accelerated interest expenses' and potentially tax deductible if you've used your loaned crypto for business or investment purposes provided you meet the IRS criteria.
So you’ve borrowed DAI using the Maker protocol - now what?
Whether you’ll pay tax on your DAI all depends on what you do with it. If you sell, trade or spend your DAI - you’ll need to pay Capital Gains Tax on any profit you make as a result of that transaction.
As DAI is a stablecoin pegged to the US dollar, it’s unlikely that you’ll have any particularly large profits from these transactions as your cost basis will be very similar to your sale price. This said, you still need to report these transactions to the IRS on Form 8949 - even if you have no realized gain or loss.
If you instead invest your DAI - into a liquidity pool for example - you may be liable for Income Tax on any new coins or tokens earned depending on the specific protocol.
You can learn more about liquidity pool taxes in our DeFi tax guide. But in brief, if you’re trading liquidity pool tokens and realizing a gain, this will be subject to Capital Gains Tax. Meanwhile, if you’re earning new tokens or coins, this is more likely to be subject to Income Tax.
Want to vote on key issues around MakerDAO’s future development? You’ll need MKR tokens.
When you buy MKR tokens - provided you purchase them with fiat currency and not another cryptocurrency, you’ll pay no tax for this transaction. But if you trade crypto for your MKR tokens, you’ll need to pay Capital Gains Tax on any profit as a result of your trade.
Like with any other cryptocurrency - you’ll pay Capital Gains Tax on any profit if you sell or trade your MKR token(s).
If you decide to stake your MKR tokens - like through Crypto.com soft stake - if you’re paid out new coins and tokens, you may need to pay Income Tax based on the fair market value of those tokens at the point you receive them.
It depends on where you live - each tax office has different reporting requirements for crypto, but you should keep good records of your Maker transactions regardless.
In the US, you need to report each taxable crypto transaction on Form 8949, including:
You’ll also need to report your net capital gain and loss on Schedule D and any crypto income on Schedule 1 and potentially Schedule C.
It’s a lot of work. If you’re an active investor on Oasis, as well as stacking the protocol on other DeFi platforms, your transactions can quickly mount into thousands per financial year.
You’ll need good records of all your transactions on Maker with all the information - you can do this manually or with a crypto tax app. Let’s look at both.
You need your Maker transaction history to do your crypto taxes. There’s two ways you can do this.
No. Maker doesn’t provide tax reports and you can’t download one from the Oasis.app. But you can get a Maker tax report from a crypto tax calculator.
No. You won’t receive a financial statement from the Oasis.app.
You can do this manually or with a crypto tax app. Let’s look at both.
If you’re doing your taxes yourself, you need a complete transaction history from Maker for the financial year. You can get a CSV file of this using sites like Etherscan. You’ll then need to identify each taxable transaction, the subsequent income or capital gain/loss and report this to the IRS using Form 8949 for capital gains and losses, Schedule D for net capital gains and losses and Schedule 1 for crypto income (and potentially Schedule C too for income).
Alternatively, use a crypto tax app to do all this for you. All you need to do is sync your Maker transactions using API. Your crypto tax app will then identify your taxable transactions and calculate any capital gains, losses and income for you. You can then download a tax report specific to your location to hand over to your tax office - for example, you can download a pre-filled Form 8949 and Schedule D.
Maker doesn’t have an option to export a CSV file of your transaction history. But you can use Etherscan to download a CSV file, or create a CSV file yourself and do your taxes manually. Depending on the wallet you’re using to interact with Oasis.app - you may be able to download a CSV file from your wallet too.
The easier option is to use crypto tax software to get your Maker transaction history via API.
To do this, you’ll need your Ethereum public address. You can normally find this in the wallet you’re using to interact with the Oasis.app. We’ve got instructions on how to get your public address for most of the wallets supported by Maker, you can find them in our integration pages - just search for your wallet.
While you don’t need to complete any KYC verification processes to interact with the Oasis.app, the specific wallet you’re using to interact with Maker protocols might. If you’ve completed KYC verification at any point, the IRS has previously requested this information from crypto exchanges to ensure tax compliance.
As well as this, many wallets require you to link a credit or debit card. The IRS can also request bank statements during an audit.
If you’re moving your DAI onto centralized exchanges, many of these exchanges report to the IRS by sending out 1099 forms.
Overall, the best way to stay tax compliant and avoid an audit from the IRS is to report your crypto taxes accurately.
If you’ve been wondering is Koinly a Maker tax calculator tool, the answer is, yes! Not only can Koinly import Maker transaction history, but Koinly can also calculate your Maker taxes in a format that makes sense for your country’s tax office. As a Maker tax calculator, Koinly is able to do a bunch of impressive tasks that save you time and can even save you from paying too much taxes.