Two U.S. cryptocurrency industry organizations have sued three Illinois officials to block the state’s 0.2% tax on digital assets from taking effect on January 1, 2027. The plaintiffs argue that the tax exceeds the state’s authority and would increase compliance costs for businesses and users.
Six legal claims have been filed.
This 39-page complaint has been filed with the Sangamon County Circuit Court in Illinois, requesting that the court declare the Digital Asset Tax Act invalid and enjoin its enforcement. The complaint alleges that the act violates the U.S. Constitution, the Illinois Constitution, and the federal Internet Tax Freedom Act.
The plaintiff argues that the law taxes digital asset exchanges, transfers, and custody services provided by "brokers," with the tax base being the full value of the client's digital assets, not just transaction gains. Under this design, users may be taxed even if they have not sold their assets or completed a transfer of ownership.
- The plaintiffs are the Blockchain Association and the Crypto Innovation Council.
- The defendants include the state tax commissioner and the state attorney general.
- The primary goal is to prevent the tax law from taking effect in 2027.
The plaintiffs also stated that the law is vaguely worded, making it difficult for businesses and users to determine which activities fall within the scope of taxation or who is responsible for collecting and remitting taxes. Due to the risk of civil liability and potential criminal penalties in severe cases, affected businesses have begun increasing their legal and tax expenditures.
Interstate transactions may be subject to double taxation
The complaint argues that Illinois has not clearly limited its taxation authority to in-state economic activity. Under current law, regulators may determine that a transaction occurred in Illinois based on the customer’s address, account records, mailing information, or IP address.
Industry organizations have stated that this method of determination may conflict with rules in other states. If another state also classifies the same transaction as occurring within its jurisdiction according to its own standards, a single digital asset transfer could be taxed by two jurisdictions simultaneously.
The complaint also notes that Illinois does not provide a credit for similar taxes paid in other states, meaning that cross-state digital asset activities may face a higher tax burden than transactions conducted solely within a single state.
Both brokers and clients must file reports.
This tax was signed into law by Governor JB Pritzker in June of this year as part of Illinois’ $55.9 billion fiscal year 2027 budget. State budget documents project that the tax will generate approximately $60 million in annual revenue.
Under the law, brokers offering digital asset exchange, transfer, or custody services to customers in Illinois must pay a “franchise tax” of 0.2% on the value of the digital assets associated with the relevant business. Certain out-of-state brokers may also be subject to this tax if they generate at least $100,000 in revenue from Illinois customers within a 12-month period.
Brokers within scope must complete registration, collect taxes separately from clients, maintain transaction records, and file monthly reports. If brokers do not collect taxes on behalf of clients, clients must calculate their own taxes and pay them to the tax authority by the 20th of the following month.
The same tax has been subject to a second lawsuit.
This is the second industry lawsuit challenging Illinois’ 0.2% digital assets tax. The Digital Chamber filed a separate lawsuit in the same court in July, arguing that the state imposes different tax treatment on digital asset transactions compared to similar traditional asset transactions.
The plaintiff also questioned the legislative process, stating that the relevant provisions were inserted into a large, comprehensive bill during the final stages of the legislative session. Industry organizations had previously publicly opposed the tax, noting that affected businesses received little to no adequate notice.