On 18 August the Securities and Exchange Commission proposed Regulation Crypto Assets, and the reading that spread fastest was relief from fifty state regimes. The proposal does contain preemption. It is narrower than the relief being described, and the sentence is worth reading as written: the proposed rules "would preempt state securities law registration and qualification requirements with respect to offers and sales of securities issued pursuant to an exemption in Regulation Crypto Assets, as well as certain secondary market transactions."
Registration. Qualification. Nothing else.
Ten weeks before that proposal, Illinois had already legislated in the space the sentence does not cover. Its Digital Asset Tax Act takes effect on 1 January 2027 and taxes digital asset activity at 0.2 percent of the value of the asset involved, whether or not anything is bought, sold, or gained.
It did not reach the tax.
1 What Illinois Actually Taxes
The operative provision imposes the tax "upon the privilege of receiving any digital asset business activity by a customer in this State at the rate of 0.2% of the value of the digital asset to which the digital asset business activity relates."
Three things follow from that wording, and none of them is a tax on trading.
The base is the asset, not the transaction. The measure is a percentage of what the asset is worth, not of what the broker charged or what the customer made. A tax on gains cannot exceed the gain. A tax on value has no such ceiling.
The taxable event includes moving your own property. The Act defines a taxable activity as "any single occurrence" of exchanging, transferring, or storing, and transfer expressly includes "moving the digital asset from one account or storage of a customer to another account or storage of the same customer." No counterparty, no change of ownership, no realisation. The tax attaches to relocation.
And storage has no unit. The complaint filed against the Act puts the problem plainly: storage "is not a discrete event; it is a state that persists for as long as a customer leaves digital assets with a custodian," and the Act does not say whether a year of paid custody is one occurrence, whether each billing period is one, or whether a new occurrence arises every time a balance changes. On the plaintiffs' reading the answer "could affect tax liabilities by orders of magnitude." A custodian cannot price a service whose tax base is undefined.
2 The Comparison Illinois Has Already Drawn
The sharpest argument against the Act is not in the crypto industry's briefing. It is in Illinois's own tax code, which exempts money and bullion from its sales and use taxes.
| Activity by an Illinois customer | Illinois tax on the activity |
|---|---|
| Buying or selling stock through a brokerage | None on the trade. Gains are taxed as income |
| Wiring dollars between two of your own accounts | None |
| Leaving cash, gold or securities with a bank for storage | None |
| Exchanging, transferring or storing a digital asset through a broker | 0.2 percent of the asset's full value, per occurrence |
Illinois already taxes crypto gains. It conformed to the federal treatment of digital assets as property in 2022, so income and capital gains have applied for years. This is not a gap being closed. It is a second tax, on activity rather than on gain, applied to one asset class and not to its closest analogues.
That is also the shape of the plaintiffs' strongest claim, and the reason we are watching it rather than predicting it. The federal Internet Tax Freedom Act bars discriminatory state taxation of electronic commerce, and Illinois has lost on that ground before. In Performance Marketing Association v. Hamer the Illinois Supreme Court held the state's click through nexus law expressly preempted by the Act and therefore void, because it imposed an obligation on retailers who marketed online while leaving retailers who marketed in print or on broadcast untouched. Same state, same statute, the same structure of argument.
3 Why This Reaches Infrastructure Rather Than Speculation
A 0.2 percent levy sounds like a nuisance for a retail buyer. Read against the fee it sits on top of, it is something else.
The tax is measured on the asset's value even where, as the complaint notes, "the broker's fee for the service is only a tiny fraction of that value." Custody and transfer are priced per instruction, not per dollar moved. A custodian may charge the same to move ten dollars of bitcoin and a million, while the tax on the second is a hundred thousand times the tax on the first. For low margin, high turnover activity, which is to say market making, collateral movement, and institutional custody, a levy on notional value is not a tax on the margin. It exceeds it.
Two further provisions push the same way. A single trade may be an exchange, a transfer, and then storage, and the Act does not say whether that is one taxable occurrence or three. And the broker carries the sourcing risk: Illinois residence is presumed from a home address, a mailing address, or an Illinois internet protocol address, "the burden of proving that a customer is not located in this State is on the digital asset broker," and the broker is liable for the tax "whether or not the tax has been collected."
None of that changes the incentive to speculate. All of it changes the cost of holding, moving and settling. Whatever the Act was for, what it prices is the infrastructure layer.
4 How It Was Enacted
The process matters here because it is a claim in the case and because it describes a mechanism other states can copy.
Senate Bill 3019 was introduced in January 2026 as a two page bill about loans on agricultural property, and passed the Senate unanimously in April. On 31 May, the final day of the session, two House amendments replaced everything after the enacting clause and turned it into a 1,624 page bill covering, among much else, vehicle weight restrictions and gambling licence extensions. The Digital Asset Tax Act was inside it, under twenty pages of the total, carrying no legislative findings and no statement of purpose. Committees gave about an hour of public notice. The House passed it the same day and the Senate in the early hours of the next. The Governor signed it on 16 June as Public Act 104-468.
We are not in a position to say whether that violates the Illinois Constitution's three readings requirement or its single subject rule, which is one of the questions before the court. What we can say is that a tax on settlement infrastructure was written without a hearing that addressed it, and that nothing about the method is unique to Illinois.
5 The Other Side
Four arguments cut against this paper, and the first two are serious.
The Act may not survive. Two trade associations sued on 21 August in Sangamon County, a separate suit was filed in July, and a repeal bill has been pending since 22 June. Performance Marketing suggests the discrimination claim has a real path. Writing about the structure of a statute that may be void within months invites the obvious objection. Our answer is that the durable claim here is not about Illinois. It is that federal preemption of securities registration leaves state taxing power untouched, and that the choice of tax base is where a state's leverage over this industry actually sits. Illinois is the demonstration, not the subject.
An adverse ruling would invert the lesson. If the court holds the Act preempted, the takeaway is not that states hold an untouched lever but that the lever has a federal limit, and that limit was found quickly. We would report that as a correction rather than defend the frame.
The point may be unremarkable. Securities preemption has never displaced state tax authority, for any asset class, and a reader entitled to say so would be right. Our claim is not that the taxing power survived. It is that the base chosen here, total value rather than fee, per occurrence rather than per sale, including movement between a customer's own accounts, has no analogue in how Illinois taxes any comparable asset, and that this combination is what reaches settlement rather than speculation.
And the numbers are not in evidence. Neither the complaint nor any state document we could find estimates the revenue, and no one has shown how much low margin, high turnover activity is sourced to Illinois. Without either figure the reach of this tax is an argument about mechanism, not a measured effect.
6 What Would Settle It
- How the court treats the Internet Tax Freedom Act claim. If it follows Performance Marketing, a levy that attaches to digital activity while exempting the closest non digital analogue is blocked well beyond Illinois.
- How the Department of Revenue defines a single occurrence of storage. Annual is a rounding error for a custodian. Per balance change is a different business.
- Whether any other state introduces a comparable measure in its 2027 session. One state is an incident. Two is a template.
- Whether House Bill 5798 moves. It was filed on 22 June to repeal the Act and has been awaiting a committee assignment since.
- Whether the base is amended from value to fee. If it is, this becomes an ordinary tax on a service and the argument in this paper stops applying.
If the Act is struck down, we will have learned where the federal limit on state discrimination sits, which is worth knowing on its own. If it takes effect on 1 January, then the industry that spent August reading a proposed federal rule about registration will spend 2027 discovering which of its costs a state can set without asking anyone.
7 Sources
Statutory language and legislative history are quoted as they appear in the verified complaint, a public court filing. Retrieval 31 August 2026.
- Blockchain Association and Crypto Council for Innovation v. Harris, Raoul and Milhiser, verified complaint for declaratory and injunctive relief, Circuit Court of the Seventh Judicial Circuit, Sangamon County, filed 21 August 2026. The rate and base at Act section 3-20(a), the definition of a taxable occurrence and of transfer at section 3-15, the storage and value problems, the sourcing presumption and broker liability at section 3-35(a), the exemption of money and bullion at 35 ILCS 105/3-5(8) and 120/2-5(18), Illinois conformity to federal property treatment, the passage of Senate Bill 3019 and Public Act 104-468, and the citation to Performance Marketing.
- SEC, SEC proposes new Regulation Crypto Assets, press release 2026-76, 18 August 2026. The preemption sentence quoted at the top of this paper. The rule is proposed and not in force; comments close on 20 October 2026.
- Performance Marketing Association v. Hamer, 2013 IL 114496, Illinois Supreme Court, 18 October 2013. Illinois's click through nexus law held expressly preempted by the Internet Tax Freedom Act as a discriminatory tax on electronic commerce, and therefore void.
- PwC, Illinois enacts tax on digital asset business activity, 31 July 2026, and Reed Smith, First in nation digital asset tax hits Illinois and a lawsuit. Independent summaries of the Act and the litigation.
- Illinois General Assembly, House Bill 5798, filed 22 June 2026 to repeal the Act.
- OX85, Who enforces the rules?, July 2026, and Who decides it is over?, August 2026.
On sourcing, and on what we did not use. We quote the statute as rendered in the complaint and have not pulled the compiled text of 35 ILCS 195 independently; a reader relying on the exact wording should do so. Characterisations of the Act as the first of its kind in the country appear in the complaint at paragraph 2 and in secondary coverage, and are the plaintiffs' framing rather than a finding, so we do not adopt them. We make no prediction about the outcome of either suit, and nothing here is legal or tax advice. We could not locate a state revenue estimate for the Act, which would materially sharpen the question of what it is for. A search result encountered while preparing this paper described the Act as already repealed; that is wrong, and House Bill 5798 remains awaiting a committee assignment. The separate suit filed in July by another trade association is noted from secondary coverage; we did not read that complaint.
This paper is published for informational purposes and does not constitute investment, legal or tax advice. It describes an enacted state statute that is subject to pending litigation and a proposed federal rule that is not in force, either of which may change. Figures and quoted language are as of the dates stated.