Illinois’ first-in-U.S. crypto transaction tax applies even to losing trades

The tax also risks being challenged in court.

Illinois’ new tax on digital asset transactions risks hurting trading volume and market liquidity, making the state unfriendly for the industry and prompting legal battles.

The fiscal 2027 state budget, which Gov. J.B. Pritzker signed in June, puts a 0.2% tax on the value of transactions in assets such as NFTs, bitcoin and other cryptocurrencies, starting Jan. 1. Such transactions include exchanges, transfers or custodial services.

It’s the first such tax in the country. Affected businesses include crypto exchanges, trades, wallet and custody providers holding customer assets and firms transmitting digital assets between accounts. The law applies to any digital asset broker with a place of business in Illinois and to any brokers that gross $100,000 or more in annual digital asset receipts with Illinois residents.

Compliance will require brokers to collect and retain customers’ personal online transaction history, account information, mailing address, IP address and other data to indicate Illinois is the customer’s place of primary use.

Because the tax targets transactions rather than profits, brokers must collect it even when a trade loses money or when assets are transferred between accounts. For gains, the new tax will be an addition to Illinois’ current 4.95% individual income tax, which applies to capital gains.

Lawmakers expect the tax to generate $60 million a year.

Research on traditional financial transaction taxes has shown they reduce trading volume and market liquidity. That makes it difficult for buyers and sellers to find ideal pricing and increases market volatility. A volatile digital currency market could complicate Illinois residents’ ability to predict the outcomes of their investments in the sector.

Industry voices warn that the new tax will make Illinois a uniquely hostile business environment for digital asset entrepreneurs and the startup community surrounding them. This comes at a particularly inopportune time for entrepreneurs in the business, as certain startups are required to register with the state under the Digital Assets and Consumer Protection Act, enacted last year in an attempt to bring regularity and predictability to the crypto market. Registration requires businesses to pay a $5,000 application fee, hire a full-time compliance manager and create written compliance policies and procedures.

While the law targets cryptocurrencies, its broad language makes possible an interpretation that includes electronic transfers of traditional financial assets like stocks, options contracts and index funds. That definitional ambiguity will likely be worked out in the rulemaking process before the law takes effect, but given the General Assembly’s previous attempts to tax transactions on traditional financial assets, a broader interpretation of the new tax should not be ruled out.

The new tax also could bring legal challenges for the state. Digital asset brokers seeking parity with traditional financial institutions could argue that singling out their activity over that conducted with traditional financial instruments unfairly discriminates against the digital medium.

To stop the digital asset tax, contact your state representative here.