Introduction of New Tax on Digital Assets in Illinois
Starting January 1, 2027, a new 0.2% tax on digital assets will be implemented in Illinois, as outlined in the recently released draft rules by the Illinois Department of Revenue. This taxation will apply to a variety of crypto transactions, including trades, transfers between wallets, stablecoin activities, decentralized Finance (DeFi) interactions, and cross-chain operations.
Background and Legislative Framework
The proposed guidelines, open for public feedback until October 30, were announced on September 28, though they are still in draft form and have not yet been submitted to the Illinois Secretary of State or the Joint Committee on Administrative Rules for review.
The taxation stems from the Digital Asset Tax Act, which was approved by Governor JB Pritzker on June 16, and is part of Public Act 104-468. This act mandates a tax levied on the value of digital assets when Illinois users engage with brokers to either exchange, transfer, or store these assets.
Taxation of Digital Assets
One of the notable aspects mentioned in the draft is how stablecoins will be treated. Regulations classify these digital currencies—aimed at maintaining a stable value against traditional currencies or commodities—as taxable digital assets. Officials argue that exceptions for certain non-investment digital representations do not encompass stablecoins.
Conversely, non-fungible tokens (NFTs) are exempt from the tax. The draft explicitly states that NFT transactions do not incur taxes as these assets possess intrinsic value or utility beyond mere digital representation, such as art and collectibles.
Tokenized securities and commodities are also included in the exempt category, as the draft groups them under digital assets with distinct value or usefulness.
Tax Calculation and Exemptions
It’s essential to understand that the 0.2% tax is calculated based on the asset’s value at the time of the transaction, not just on any fees charged by the brokers involved. Brokers are instructed to determine this value using a spot price or a regulated market benchmark if a spot price isn’t available.
DeFi activities are not automatically subject to this taxation. Generally, transactions on decentralized exchanges will not incur the tax unless users provide valuable consideration to a broker. Interestingly, fees paid to miners or swap fees directed solely to liquidity providers do not count as valuable considerations. However, platform fees associated with maintaining DeFi services are considered valuable, making those transactions potentially taxable.
In addition, a decentralized exchange that collects such fees may be recognized as a digital asset broker, while peer-to-peer transactions without a broker remain tax-free. Similarly, internal transfers within the same entity that do not create blockchain movement are not taxable, as seen in the case of banks adjusting customer accounts without actual asset movement.
Tax Implications for Transactions
When involving third-party services, retail payments made via an exchange-managed wallet will incur taxes, particularly if a transfer fee is charged. Notably, simply receiving cryptocurrency payment does not classify a retail business as a digital asset broker.
Cross-chain transactions are specifically included as taxable exchanges in the draft. This encompasses the activity of transferring assets between different blockchain networks, which will incur the 0.2% tax when conducted by brokers for compensation.
Examples of other taxable activities given in the draft include spot trades and the purchasing or converting of cryptocurrencies to cash. Validators are instructed to apply the same tax rate uniformly; thus a $10,000 transaction could result in a $20 tax, irrespective of the investor’s profit or loss status.
Certain brokers outside of Illinois may also be liable for the tax if they generate over $100,000 from Illinois clients. Following January’s implementation, these brokers will be obligated to collect and report the tax separately from service fees.
Opposition and Future Developments
However, this tax law faces substantial opposition. The Blockchain Association and the Crypto Council for Innovation have initiated legal action against Illinois to prevent enforcement of the 0.2% tax while challenging its legality in court. Furthermore, amidst ongoing discussions, a bill seeking to repeal the Digital Asset Tax Act, HB 5798, is currently pending in the Illinois House.
The Department of Revenue is set to accept public comments on the draft rules until the end of October, after which a more permanent regulatory framework will be established following formal administrative processes. Currently, no legal hurdles have been reported that would prevent Illinois from carrying out the law as scheduled.
