Crypto Clash: Illinois’ 0.2% Tax Sparks Industry Lawsuit

Two cryptocurrency advocacy organizations in the United States have filed a lawsuit against three officials in Illinois, aiming to prevent a 0.2% tax on digital assets from being implemented starting January 1, 2027.

Legal Challenges Against Illinois Crypto Tax Grow

The complaint, spanning 39 pages, was lodged by the Blockchain Association and Crypto Council for Innovation in the Sangamon County Circuit Court, seeking both declaratory judgment and injunctive relief regarding the Digital Asset Tax Act.

The suit targets Illinois Department of Revenue Director David Harris, Attorney General Kwame Raoul, and Sangamon County State’s Attorney John Milhiser, challenging those responsible for the tax’s implementation and enforcement.

The document asserts that the proposed tax would apply to the entire value of a customer’s digital assets whenever a broker processes an exchange, transfer, or storage of those assets. The groups indicated that customers may incur this tax even if they do not sell, transfer, or profit from their assets.

The lawsuit outlines six counts based on both federal and state legislative frameworks. The CCI and Blockchain Association contend that the tax contravenes the federal Internet Tax Freedom Act, the Commerce Clause, and due process provisions found in the U.S. Constitution.

On the state level, they argue that the tax breaches Illinois’ Uniformity Clause, improperly assigns tax responsibilities to an administrative body, and violates a constitutional stipulation that mandates bills be presented by title on three distinct days in each legislative house.

Labeling the tax as “unconstitutionally vague,” the plaintiffs state that brokers and Illinois consumers cannot clearly discern what activities the law covers or who is responsible for collecting and paying the tax. They warn that such ambiguity could lead to serious repercussions, as violations could subject brokers to a Class 3 felony charge.

The document also notes that several members of the organizations are already incurring expenses for external legal and tax advice, as well as adapting their systems to meet the tax obligations. The plaintiffs argue that failing to obtain judicial review could force affected companies to either limit their services to Illinois customers or risk facing criminal sanctions.

Concerns Over Double Taxation on Interstate Transactions

In its Commerce Clause argument, the lawsuit claims that Illinois has not adequately confined the tax to economic activities within its borders. The law permits authorities to designate a transaction as being conducted in Illinois based on factors such as customer addresses, account records, or IP addresses.

This could lead to a situation where another state applies its own location criteria for the same transaction, potentially resulting in two jurisdictions imposing taxes on a single transfer. For instance, a customer physically in another state but using an Illinois address for an online transaction may trigger conflicting tax obligations if both states enforce similar regulations.

The lawsuit highlights that Illinois does not allow credits for taxes paid to other states. Consequently, the plaintiffs argue that the law could disadvantage interstate digital asset activities compared to transactions that occur entirely within a single state.

Summer Mersinger, CEO of the Blockchain Association and a former Commodity Futures Trading Commission member, emphasized that while states have the authority to foster new industries, they must adhere to constitutional confines.

“Illinois cannot enact a unique tax structure that adversely affects digital trade, generates uncertainty for consumers and businesses, and risks fragmenting a swiftly expanding national marketplace.”

The Internet Tax Freedom Act claim centers on how the tax affects digital commerce. The plaintiffs assert that this federal law prohibits states from levying unfair taxes on electronic transactions that do not similarly affect offline activities.

According to the lawsuit, Illinois does not apply a similar tax on the exchange, transfer, or storage of cash, stocks, bonds, or precious metals. For example, an Illinois resident can store gold in a safe deposit box without incurring the proposed tax but would have to pay the 0.2% tax for storing Bitcoin through a service.

Responsibilities for Brokers and Customers

As previously reported by crypto.news, Governor JB Pritzker approved the tax as part of Illinois’ $55.9 billion budget for fiscal year 2027. The state anticipates that the tax could yield around $60 million annually.

This new “privilege tax” of 0.2% will be assessed on the value of digital assets linked to services provided to Illinois customers. These services encompass the exchange, transfer, and storage of digital assets via brokers.

Tax advisory firm BDO USA notes that some out-of-state brokers may fall under this law if they generate at least $100,000 from Illinois customers over a 12-month timeframe. The law applies various location criteria, such as billing information and customer records.

Brokers who are subject to the tax must register with the Illinois Department of Revenue, collect the tax separately from customers, maintain transaction records, and file monthly reports. If a broker fails to collect the tax, the statute instructs the customer to self-assess the tax and submit payment to the department by the 20th of the following month.

The recent lawsuit claims that different provisions in the law create confusion about which entities must comply with certain obligations. One section places collection responsibilities on brokers that have a business location in Illinois, while another seems to demand that any broker conducting a sale collect the tax regardless of the same revenue threshold.

CCI and the Blockchain Association have also expressed concerns over the legislative process that led to the tax’s passage. They assert that Senate Bill 3019 initially started as a two-page proposal regarding agricultural property loans before being amended on the last day of the legislative session.

Subsequent amendments expanded the bill into a 1,624-page document addressing topics from vehicle weight regulations to sports betting. The complaint states that the digital asset provisions occupied under 20 pages and lacked any legislative findings justifying the tax.

The groups allege that there was minimal notice given to the public before committee hearings, with both legislative chambers passing the revised bill in less than 24 hours. Pritzker signed it into law on June 16, designating it as Public Act 104-468.

Another Challenge Against the Same Tax Levy

This lawsuit marks the second legal challenge against the Illinois tax from the industry. In July, the Digital Chamber initiated its own suit in the same state court, asserting that Illinois taxed digital asset services differently than it treated similar transactions involving traditional assets.

The Digital Chamber seeks to have the law declared invalid and unenforceable, citing alleged violations of both federal and state constitutional protections as well as contesting the state’s choice to determine tax treatment based on the technology used for asset transactions.

Opposition to the law began even before the budget’s enactment. The Crypto Council for Innovation urged Pritzker to veto the digital asset provisions outright, while the Digital Chamber and the Illinois Blockchain Association argued that lawmakers had provided insufficient notice to affected businesses.

Michael Saylor, co-founder of Strategy, later critiqued the law as a significant misstep. Miles Jennings, general counsel and head of policy at a16z Crypto, noted in June that no equivalent financial transaction tax existed for stocks, bonds, or derivatives.

Illinois is also engaged in a separate legal dispute regarding prediction markets. Kalshi has challenged a state law that categorizes sports event contracts as wagers, necessitating operators to secure state licenses.

In its federal complaint, Kalshi argues that the Commodity Exchange Act provides the CFTC with exclusive jurisdiction over contracts listed by federally regulated markets. The company asserts that conforming to Illinois’ licensing demands would lead to excessive costs, while barring state residents might necessitate new geofencing systems.

Pritzker had previously issued Executive Order 2026-04, which restricts state employees from participating in prediction markets when they could use nonpublic information received through their roles to profit or mitigate losses.