Illinois' 0.2% Cryptocurrency Tax Faces Opposition from Justice Department, Business Organizations and DeFi Sector
Legal challenges mount against Illinois' controversial 0.2% digital asset tax as the Justice Department, major business organizations, and decentralized finance companies raise concerns over implementation costs and conflicts with federal cryptocurrency policy.
The United States Department of Justice, alongside major business organizations, financial sector associations, and a group of decentralized finance (DeFi) companies, have thrown their support behind legal challenges opposing Illinois' proposed 0.2% digital asset tax. Critics contend that this legislation unjustly singles out cryptocurrency-related transactions and has the potential to levy taxes on investors even in situations where no financial gains are realized.
During the previous week, the Justice Department submitted a statement of interest in the matter, while the Securities Industry and Financial Markets Association (SIFMA) and the US Chamber of Commerce filed an amicus brief. Additionally, a coalition comprising venture capital giants Andreessen Horowitz and Paradigm, along with cryptocurrency protocols Uniswap and Aave Labs, also submitted a brief in opposition, as revealed in a Thursday statement released by the Blockchain Association and Crypto Council for Innovation.
Passed into law in June, the legislation establishes a 0.2% tax rate applied to the value of digital assets that are exchanged, transferred or held in storage, irrespective of whether the transaction results in a profitable outcome.
The Digital Chamber initiated legal proceedings against Illinois Attorney General Kwame Raoul and David Harris, the state's revenue official, in July. This was followed by an additional legal challenge launched by the Blockchain Association and Crypto Council for Innovation in August. The tax, which was initially set to become effective on Jan. 1, 2027, has been postponed until July 1, 2027, providing additional time for these legal challenges to be heard.
State legislators who played a role in promoting the bill and representatives from the governor's office failed to provide responses to Cointelegraph's inquiries for comment prior to the article's publication.
Business groups warn of crypto tax costs and legal violations
Through a Nov. 6 court submission, SIFMA and the US Chamber of Commerce cautioned that the Illinois tax measure would impact financial institutions including banks, broker-dealers, custodial services and asset management firms throughout the nation, potentially subjecting them to substantial compliance-related expenses. The organizations also drew attention to the financial strain that would be placed on their clients.
This means that a customer who loses money owes the same tax as a customer who earns a profit. And a customer who moves the same asset between two accounts faces tax (potentially on both ends) without a sale, a gain, or a change in beneficial ownership.
According to these organizations, financial firms would be required to build infrastructure capable of identifying customers based in Illinois, establishing values for digital assets, and ascertaining which transactions fall under taxable categories, all while confronting the risk of criminal sanctions for noncompliance.
The organizations further contended that the tax creates discriminatory treatment against digital asset services given that similar transactions involving conventional assets do not face equivalent taxation, which may violate federal protections against internet taxation as well as constitutional mandates governing interstate commerce and uniform tax treatment.
DOJ challenges tax policy as DeFi firms warn of developer liability
The Justice Department entered the fray on Nov. 6 as well, asserting that Illinois' tax on digital assets works against federal initiatives designed to encourage innovation in cryptocurrency and maintain US dominance in this emerging sector.
The department's submission referenced the establishment of a Strategic Bitcoin Reserve and the GENIUS Act, legislation that put in place federal regulatory frameworks for stablecoins. According to the DOJ's argument, creating less advantageous tax conditions for digital assets might create conflicts with these existing federal policies.
In a separate action, the DeFi coalition raised alarms regarding potential liability for tax collection responsibilities. Through a Nov. 11 court filing, the coalition contended that the regulations proposed by Illinois could place obligations upon software developers and other individuals participating in blockchain networks who do not possess access to customer data, authority over user assets, or the practical means to perform tax collection duties.