Illinois Crypto Tax Rules Would Effectively Ban DeFi, a16z, Uniswap Labs Say

Andreessen Horowitz, Uniswap Labs and the DeFi Education Fund said Illinois’ draft cryptocurrency tax rules would effectively ban decentralized finance services.

Bitcoin.com reported on October 30 that the firms made the argument in a letter submitted that day to the Illinois Department of Revenue. In the letter, they said state authorities were treating decentralized exchanges, or DEXs, the same as traditional financial brokers under draft rules implementing the Digital Asset Tax Act.

The firms said DEXs, including the Uniswap protocol, operate through autonomous software and have no intermediary that directly controls customer assets or executes trades on users’ behalf. Unlike centralized exchanges, DEXs are structurally unable to verify customer identities, determine users’ locations, collect taxes or report individual transactions, they said.

They added that imposing those obligations would make compliance effectively impossible and could lead to a complete shutdown of DeFi services in Illinois.

Miles Jennings, a16z’s head of policy, wrote on X that the law is “one of the most anti-innovation laws in America” because it imposes taxes simply because a transaction is digital. He added that while state authorities are trying to classify DEXs as tax-collecting brokers, autonomous software is not an entity capable of collecting taxes.

One particularly controversial provision in the draft rules would require brokers to record and retain private keys for crypto assets. If that information were leaked, it could lead to the theft of customer assets.

Jennings also took issue with a provision that would tax withdrawals from centralized exchanges to private wallets and transfers of assets across blockchains, known as bridging. He said that was equivalent to taxing transfers between a person’s own accounts.