CHICAGO — A first-in-the-nation tax on cryptocurrencies and other digital assets that Gov. JB Pritzker signed last month is facing a legal challenge from an industry association that argues the law is unconstitutional because it singles out certain financial instruments based on how their transactions are recorded.

Democrats in the General Assembly approved the so-called cryptocurrency tax during legislative overtime last month as part of their effort to balance a nearly $56 billion spending plan for the budget year that began July 1. The tax, which takes effect Jan. 1, is expected to generate $60 million in new revenue to help support day-to-day operations.

In an email newsletter in early June, House Speaker Emanuel “Chris” Welch, a Hillside Democrat, touted the tax as part of an election-year affordability agenda that included “closing corporate loopholes and making big tech companies and crypto billionaires pay their fair share.”

But the Chamber of Digital Commerce, an organization that says it represents more than 250 members of the global digital asset industry, filed a lawsuit Tuesday in Sangamon County Circuit Court seeking to block implementation of the new tax. The group argues the tax violates due process rights protected under the state and federal constitutions, along with state and federal provisions protecting interstate commerce and uniform taxation.

The Washington-based organization alleges in its 32-page complaint that the Illinois law imposes a tax on “economically identical property solely because ownership is recorded and transferred using blockchain technology,” the globally dispersed digital ledger.

The chamber argues that cryptocurrency and other digital assets differ from cash, stocks, bonds and other financial instruments only in the way they are exchanged, recorded and stored. Rather than taxing “a new kind of property,” the lawsuit contends, Illinois is taxing “an old kind of property recorded in a new way.”

“Telegraphs gave way to telephones. Paper stock certificates became electronic book-entry systems. Physical trading floors became electronic exchanges. Checks evolved into electronic funds transfers and real-time payment networks,” the lawsuit states. “In no instance did the law impose materially different tax burdens on identical property merely because the infrastructure through which commerce was conducted had evolved. Blockchain technology is the next stage of that evolution: it changes the method by which ownership is recorded, verified, settled, and transferred; it does not alter the underlying economic rights in the property exchanged.”

Pritzker, a billionaire Hyatt Hotels heir and former tech investor, has in the past been a vocal opponent of taxes on other types of financial transactions. In his first public appearance with then-Chicago Mayor-elect Brandon Johnson in April 2023, Pritzker voiced his opposition to a similar tax concept the incoming mayor had embraced. Enacting such a tax at the city level would require a change in state law, and Pritzker said a few months later that he would veto any legislation authorizing a city financial transaction tax that reached his desk.

Pritzker’s office did not respond Wednesday to a request for comment on the lawsuit. Illinois Department of Revenue Director David Harris, named as the lead defendant, said in a statement that “any comments at this time would be premature.”

The state law adds a 0.2% levy on cryptocurrencies and other digital assets traded through brokers. The tax does not cover private transactions.

Beginning Jan. 1, brokers must register with the Department of Revenue and collect the tax from Illinois customers. Brokers who violate the law face potential Class 3 felony charges, punishable by up to five years in prison.

In seeking to overturn the law, the chamber argues that it is riddled with vague definitions and that the Department of Revenue had yet to provide any regulations or guidance on issues such as “when blockchain operations constitute one or multiple taxable occurrences, or prescribing how customer location is to be determined.” For example, the lawsuit alleges, a single customer could be taxed multiple times for transferring the same asset among different digital wallets without the asset ever changing ownership.

The lawsuit also argues brokers bear the burden of proving that certain transactions should not be taxed under the law, “placing on regulated businesses the burden of disproving an Illinois connection for transactions that, as a technical matter, occur in no single place.”

In addition to asking the court to issue preliminary and permanent orders blocking implementation of the tax, the chamber is seeking repayment of legal fees and other costs.

The cryptocurrency tax isn’t the only component of the state’s new tax package facing legal challenges.

Last month, online prediction market Kalshi sued the state in federal court in Chicago over a separate tax provision that seeks to tap into the growing world of sports prediction markets. The law created a 1.75% tax on each exchange wager up to 5 million per operator per year. Above that, the tax is 3.5% per wager.

The company is seeking a federal court order blocking the provision on the grounds that it is an unconstitutional attempt to impose state-level regulation on “event contracts,” which fall under the jurisdiction of the federal government. The state argues in a response filed in federal court last week that the measure was intended to “simply increase taxes on certain licensees” under an existing sports betting law and clarify that the law applies to prediction markets.

While the tax is already in effect, the state has agreed not to pursue regulatory or criminal action against Kalshi while the company’s request for a preliminary injunction is pending in federal court. Under Illinois’ sports betting law, state-licensed sportsbooks can offer so-called exchange wagers, but any new operators would need to receive a license from the Illinois Gaming Board before legally offering the wagers to customers in the state.

Because a legal challenge was expected, Pritzker’s spending plan for the current year doesn’t count on any revenue from taxing prediction markets.

Similarly, the budget doesn’t bank on any money coming in from a new tax on targeted digital advertising, which imposes a 10% tax beginning Jan. 1 on the gross receipts of companies with digital ad revenue from Illinois in excess of $1 million annually. Maryland has faced legal challenges to its similar law.

The state also could see a challenge to a measure Pritzker proposed that was part of the final budget package: a new per-user tax on large social media companies.

Even some proponents of the measure, also effective Jan. 1, acknowledged it could face legal challenges. Nevertheless, the current year’s budget relies on $200 million in anticipated revenue from the levy.

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