CFTC Chairman Michael Selig has accused Illinois lawmakers of putting Chicago’s future as a global financial center at risk with its first-of-its-kind state tax on digital asset transactions.
Selig has accused the state of moving in the opposite direction of the federal government, pointing out that the government is working towards creating a regulatory framework for digital assets.
What exactly is in the new Illinois crypto tax?
The Digital Asset Tax Act, signed by Governor J.B. Pritzker as part of a $55.9 billion budget package, makes Illinois the first U.S. state to impose a transaction-level tax on crypto activity.
The tax is 0.2% of the asset’s value on any crypto transfer by an Illinois resident. It applies to exchanges, transfers, and even storage of digital assets, and it doesn’t matter whether the user made a profit or a loss.
According to Coinbase (NASDAQ: COIN) vice president of tax Lawrence Zlatkin, an Illinois resident who buys $10,000 in crypto and sells it for the same amount would owe $40 across both trades despite breaking even.
CFTC Chairman Michael Selig recently published a Washington Times op-ed in which he says that the new law penalizes crypto activity while ignoring traditional financial transactions that look exactly the same.
“Transferring the same value in a non-crypto asset format would not result in a tax,” Selig wrote, arguing the state is treating identical economic activity differently based on technology.
He referred to the law as a “sin tax” on blockchain technology and compared the approach to a hypothetical tax on internet transactions in the 1990s. He argued that such a move would have strangled e-commerce before it matured.
The new law requires brokers to register with the state before doing business with Illinois customers starting January 1, 2027. Registration kicks in immediately upon any Illinois business activity, while a $100,000 gross receipts threshold determines when tax collection begins. Noncompliance carries a Class 3 felony charge, with penalties of up to five years in prison and $25,000 in fines.
According to the Illinois Policy Institute, lawmakers expect the tax, which takes effect in six months, to generate about $60 million in revenue next year.
Why is Illinois’ tax bill causing such a big issue?
Selig pointed out that the state law is running counter to current federal momentum. Congress is working on the CLARITY Act, which aims to establish a clear regulatory framework for crypto markets, while Illinois, he argued, chose to move in the opposite direction.
Illinois regulators have classified prediction markets as illegal gambling, putting the state on a collision course with the CFTC, which claims exclusive federal jurisdiction over those products.
Selig said in a statement earlier this year that his agency would no longer tolerate states establishing “statewide prohibitions” on prediction market products.
Prediction market Kalshi sued Illinois in late June to block new taxes and licensing requirements, arguing the state violated the Supremacy Clause of the U.S. Constitution. Legal experts expect the question to reach the Supreme Court eventually.
Industry groups, including the Crypto Council for Innovation, have argued that the law contains few meaningful exemptions for common activities, including transfers between a user’s own accounts. They also suggested Illinois should have waited for Congress to finish work on a national digital asset framework before creating its own rules.
Law firm Jones Day said the tax could face legal challenges under the U.S. Constitution’s Commerce Clause and the Internet Tax Freedom Act. The firm also pointed out that Illinois tax officials have not yet released rules explaining how to value assets or what exactly counts as taxable activity.
