Key Takeaways
- A16z, Uniswap Labs, and the DeFi Education Fund warn that Illinois’ proposed crypto tax rules could effectively ban DeFi by requiring decentralized exchanges to act as tax-collecting brokers, despite their inability to comply.
- The groups oppose requirements to store customers’ private keys and potentially tax transfers between personal wallets or blockchains. A16z’s Miles Jennings accused regulators of overstepping the law’s authority.
- Illinois’ 0.2% digital asset transaction tax faces legal challenges from crypto industry groups. Implementation has been delayed until July 2027, and the three organizations are urging regulators to revise the rules and await judicial review.
In a letter submitted Friday, Oct. 30, the three organizations argued that the Illinois Department of Revenue’s proposed implementation of the Digital Asset Tax Act incorrectly treats decentralized exchanges (DEXs) as conventional financial brokers.
The groups contend that DEXs, including the Uniswap protocol, operate through autonomous software rather than intermediaries that control customers’ assets or execute transactions on their behalf. Unlike centralized exchanges, DEXs generally cannot identify customers, determine their locations, collect taxes, or file returns on individual transactions.
The organizations argue that imposing such obligations would make compliance practically impossible, potentially creating a de facto ban on DeFi services in Illinois.
Miles Jennings, head of policy at a16z, criticized the proposal in a post on X Friday, arguing that regulators were expanding the law beyond its intended scope.
“The law is already one of the most anti-innovation bills in the country—a tax on transactions just because they’re digital,” Jennings wrote. He accused Illinois officials of engaging in “politicized rulemaking” that would classify DEXs as tax-collecting brokers, despite their inability to comply.
“Autonomous software is not a person that can collect a tax,” Jennings wrote, adding that the proposal conflicts with federal classifications of decentralized exchanges and Illinois’ own Digital Assets and Consumer Protection Act.
The organizations want regulators to explicitly exclude decentralized protocols and their interfaces from the definition of digital asset brokers, while clarifying that collecting automated protocol fees does not automatically establish broker status.
Private Key Requirement Raises Security Concerns
One particularly controversial provision would require brokers to maintain records containing cryptocurrency private keys, which are used to authorize transactions and control digital assets.
The signatories warn that collecting and storing these sensitive credentials could expose customer funds to theft if the records were compromised. They argue that the requirement conflicts with established cybersecurity practices and could force companies to choose between protecting customer assets and complying with state regulations.
The letter proposes replacing the term “private keys” with “public keys,” which can be used to track blockchain transactions without granting control over customers’ funds. The organizations also object to provisions that could tax withdrawals from centralized exchanges to personal wallets and transfers of assets between blockchains, known as bridging.
Jennings compared the proposed treatment of such transfers to taxing someone simply for moving money between their own bank accounts.
Illinois Tax Already Faces Court Challenges
Illinois enacted its Digital Asset Tax Act in June, imposing a 0.2% tax on the value of qualifying cryptocurrency transactions and other covered digital asset activity. Unlike capital gains taxes, the levy is based on the underlying value of assets involved in covered transactions rather than profits earned.
As previously covered by Bitcoin.com News, the legislation has attracted legal challenges from cryptocurrency industry organizations that argue it discriminates against digital asset activity and creates unreasonable compliance burdens. The Blockchain Association and Crypto Council for Innovation have challenged the law in court, raising concerns about overlapping taxation, constitutional protections, and potential criminal penalties.
Illinois officials subsequently agreed to postpone implementation from January 1 to July 1, 2027, allowing the litigation to proceed. Jennings expressed support for the lawsuits, predicting that the challengers would succeed in overturning the legislation.
“Consumers and entrepreneurs in Illinois deserve better,” he wrote.
The three organizations behind Friday’s letter are asking regulators to delay implementation until at least July 2027 and allow courts to review the tax’s legality before proceeding with the proposed rules.
