Illinois Lawmakers Recently Introduced a Bill to Allow Payment of State Taxes by Cryptocurrency

By: Jonathan Nessler

Representative Michael J. Zalewski  recently introduced a bill to the Illinois General Assembly that would allow for the payment of State taxes by cryptocurrency. 

House Bill 5335 was introduced in February of 2018.  The bill is currently assigned to the Revenue & Finance Committee.

The synopsis of the bill states:

Amends the Department of Revenue Law of the Civil Administrative Code of Illinois. Provides that, in addition to any other method of payment provided for by law, the Department shall accept payment for any tax imposed by the State and administered by the Department by cryptocurrency. Provides that the Department shall convert such payments to United States dollars at the prevailing rate within 24 hours after receipt of the payment and shall credit the taxpayer's account with the converted dollar amount.

Other States Might Soon Accept Tax Payments by Cryptocurrency

Illinois joins two other states by proposing that taxes should be payable using cryptocurrency.  Arizona and Georgia introduced similar bills earlier this year. 

New Hampshire attempted to pass similar legislation in 2016, but the bill failed to pass. 

Overall, laws like the one Illinois is proposing are positive for cryptocurrency and blockchain related technologies.  Allowing for payment of taxes by cryptocurrency lends credibility to the use of cryptocurrencies as currency and brings attention to other blockchain related efforts. 

That said, the Illinois bill, in its current form, is somewhat vague.  

Potential Problems with House Bill 5335

House Bill 5335 has a few noteworthy problems in its current form. 

The bill generically states that “cryptocurrencies” will be accepted for payment of taxes, but does not define “cryptocurrencies” and does not restrict the type of cryptocurrencies that will be accepted.

These vagaries are dangerous, because, although there are established cryptocurrencies like Bitcoin and Ethereum, there are also cryptocurrencies that many would consider to be scams. 

Illinois should initially restrict the type of cryptocurrencies the State will accept to established and historically trustworthy cryptocurrencies. 

Another issue with the bill concerns when the taxpayer will be credited for the payment, and, in turn, how much credit the taxpayer will receive. 

According to the bill's synopsis, “The Department shall convert such payments to United States dollars at the prevailing rate within 24 hours after receipt of the payment and shall credit the taxpayer's account with the converted dollar amount.” 

On its face, the synopsis appears to state that the exact dollar amount credited to the taxpayer will be determined at the time of the conversion. This could lead to several problems for the taxpayer. 

For instance, take the following hypothetical. Hypothetically, a taxpayer owes $10,000 in taxes. At the time of payment one Bitcoin is equal to $10,000. The moment the taxpayer initiates the transaction of one Bitcoin, the taxpayer has effectively transfers $10,000 to the State of Illinois. 

However, if the State waits until the end of the 24 hour period to convert the Bitcoin to US dollars, the Bitcoin might be worth a different amount.  Depending on market fluctuations, the Bitcoin might hypothetically be worth $9,500 when it is converted or it might be worth $10,500 when it is converted (or more, or less, or anywhere in between). 

Situations like the one explored in this hypothetical will lead to confusion for the taxpayer. The taxpayer might owe $500 more in taxes at the time of conversion, or the taxpayer might be entitled to a $500 credit at the time of conversion, or some other amount depending on market flucuations. 

Instead, Illinois should identify a trustworthy exchange to establish the value of a Bitcoin, or other cryptocurrency, and the taxpayer should receive credit at the time the transaction is initiated, based on this identifiable exchange rate. 

This means if the bitcoin is worth $10,000 at the time the transaction is initiated, that is the amount that the taxpayer is credited, regardless of the value of the Bitcoin at the time it is converted to US dollars. 

Illinois is Ambitiously Taking Steps in the Right Direction

Overall, Representative Zalewski has introduced a forward thinking and ambitious bill, which will undoubtedly be used as a model for other states.  He should be commended for his initiative.

However, it is important that the Illinois General Assembly take the time necessary to get this bill exactly right. When it does, Illinois will be a leader in an area of technology that many experts believe has the potential to radically alter our society.

Illinois' potential recognition of cryptocurrencies as a viable method of paying taxes lends more credibility to this emerging technology, and presents yet another reason why lawyers should learn about cryptocurrencies and other blockchain related technologies.

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