Two United States organizations in the encryption industry have sued three Illinois officials in an attempt to prevent the state from imposing a 0.2 per cent tax on digital assets, effective 1 January 2027. In the view of the prosecution, this tax design goes beyond the competence of the state government and also raises the cost of compliance between business and users.

Six legal claims filed

This 39-page petition was submitted to the Provincial Circuit Court of Sangamón, Illinois, requesting the court to declare the Digital Asset Tax Law null and void and prohibit its enforcement. The petition stated that the Act violated the United States Constitution, the Illinois Constitution and the federal Internet Freedom of Tax Act.

According to the prosecution, the law taxes digital assets exchange, transfer and hosting services covered by “brokers” and is based on the full value of the customer's digital assets rather than on the proceeds of the transaction. Under this design, users may be taxed even if they have not sold their assets and have not completed the transfer of ownership.

  • Prosecuting Association of Block Chains and Committee on Encryption Innovation
  • The subject of the proceedings was the Head of State Taxes and the State Attorney General. Long
  • The central claim is to prevent the tax law from coming into effect in 2027.

The prosecution also stated that the law was vague and that it was difficult for businesses and users to judge which acts fell within the scope of taxation and it was unclear who was responsible for their collection. Since violations may trigger civil liability and, in serious cases, criminal penalties may also be involved, the enterprises concerned have begun to increase legal and tax expenditures.

Cross-state transactions or double taxation

According to the complaint, Illinois did not clearly limit the scope of the tax to economic activity within the canton. Under the legislation in force, the Supervisory Authority may determine that a transaction takes place in Illinois on the basis of the customer ' s address, account records, post information or IP address.

According to industry organizations, this determination may conflict with the rules of other states. If another state also determines by its own standards that the same transaction took place in its own state, there may be cases where a digital asset transfer is taxed simultaneously by both jurisdictions.

It also stated that Illinois did not have a credit mechanism for similar taxes paid in other states. This means that cross-state digital asset activities may bear a higher tax burden than transactions completed in a single state.

Brokers and customers are required to file a declaration.

This tax was signed in June this year by Governor JB Pritzker as part of the Illinois budget of $55.9 billion for fiscal year 2027. The state budget document projects that the tax could generate approximately $6 million in revenue per year.

Under the law, brokers who provide digital assets exchange, transfer or hosting services to clients in Illinois are required to levy a “license tax” of 0.2 per cent on the corresponding digital asset value of the relevant business. Some out-of-state brokers may also be included if they receive at least $100,000 in revenue from Illinois clients within 12 months.

Brokers included in the scope are required to complete their registration, collect individual taxes from their clients, keep records of transactions and file reports on a monthly basis. If the broker does not collect it, the client must account for it and pay it to the tax authorities before the following 20 days.

The same tax is in second suit.

This is the second industrial lawsuit against a 0.2% digital asset tax in Illinois. The Digital Chamber of Commerce filed a separate suit in the same court in July, claiming that the State had different tax treatment for digital asset services and similar transactions with traditional assets.

The prosecution also challenged the procedure for the passage of the bill, stating that the relevant provisions were incorporated into a large-scale comprehensive bill in the final stages of the legislative session. Industry organizations had previously publicly objected to the tax and stated that the affected enterprises had hardly been given sufficient notice.