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Illinois clarifies cryptocurrency apportionment

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In a general information letter (GIL), the Illinois Department of Revenue clarified the corporate income tax apportionment treatment of virtual currency such as bitcoin.1 For purposes of the Illinois apportionment statute and regulations, the Department treats bitcoin as an item of intangible personal property, but the Department does not consider bitcoin a “patent, copyright, trademark, or similar item of intangible property.” These conclusions indicate that receipts from bitcoin generally will be included in the sales factor calculation.

Background The taxpayer requested a GIL to clarify the classification of bitcoin for apportionment purposes. As explained by the Internal Revenue Service (IRS) in Notice 2014-21, bitcoin is a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value,” but it does not have legal tender status in any jurisdiction.2 Bitcoin is a convertible virtual currency that may be used to purchase goods or services, or it may be purchased and held as an investment.3 The IRS has determined that convertible virtual currency is treated as property rather than currency. As a result, “[g]eneral tax principles applicable to property transactions apply to transactions using virtual currency.”4

Virtual currency treated as intangible personal property The Department agreed with the taxpayer that bitcoin is treated as intangible personal property for Illinois apportionment purposes, which is accomplished through the use of a single sales factor.5 The Illinois apportionment statute and regulations provide detailed sourcing rules for gross receipts from intangible personal property.6 In the case of interest, net gains and other items from intangible personal property, Illinois generally uses a cost of performance methodology to source sales.7 However, if the taxpayer is a dealer of intangible personal property within the meaning of Internal Revenue Code (IRC) Sec. 475, the income or gain is sourced to Illinois if it is received from a customer in the state.8 The apportionment regulation provides that “an item of ‘intangible personal property’ includes only an item that can ordinarily be resold or otherwise reconveyed by the person acquiring the item from the taxpayer.”9 Illinois generally requires that terms used in Illinois income tax law have the same meaning as when used in a comparable context in the IRC in effect for the tax year.10 As discussed above, the IRS has confirmed that convertible virtual currency such as bitcoin is treated as property. Because bitcoin is not tangible personal property, it must be classified as intangible personal property.

Virtual currency not considered a patent, copyright or trademark Although bitcoin is classified as intangible personal property, it is not considered a patent, copyright, trademark or other similar item of intangible personal property for Illinois income apportionment purposes. The Illinois apportionment statute and regulation provide that gross receipts from the license, sale or other disposition of patents, copyrights, trademarks or other similar items of intangible personal property are sourced to Illinois to the extent the item is used in the state during the year the gross receipts are included in gross income.11 However, gross receipts from patents or similar items only are included in the sales factor if the gross receipts from these items are more than 50% of the taxpayer’s total gross receipts included in gross income during the tax year and each of the two preceding tax years.12 According to the Department, this provision does not apply to bitcoin because it is not registered as a patent, copyright, trademark or other similar item of intellectual property under federal law.

Commentary The Department’s treatment of bitcoin for Illinois income tax apportionment purposes is not surprising and is consistent with the position on convertible virtual currency expressed by the IRS in Notice 2014-21. Although relatively few states have issued guidance on the income tax treatment of virtual currency, they have been consistent with the guidance issued by the IRS. In 2015, for corporation business tax and gross income tax purposes, New Jersey announced that it follows the federal tax treatment of convertible virtual currency as explained by the IRS in Notice 2014-21.13 Also, New York conforms to the federal treatment of convertible virtual currency as provided in Notice 2014-21 for corporation tax and personal income tax purposes.14 Earlier this year, Wisconsin issued guidance explaining that virtual currency is intangible property treated for tax purposes similar to other types of intangible property.15

The GIL implies that the Illinois sales factor includes gross receipts from bitcoin, providing factor representation for gross receipts that are included in the Illinois corporation income tax base. By concluding that bitcoin is not a copyright or similar type of intangible personal property, there is no threshold requirement that gross receipts from bitcoin exceed 50% of total gross receipts before they may be included in the numerator and denominator of the sales factor.

Virtual currency such as bitcoin raises unique tax issues because it may be used as currency as well as an investment. However, the investment aspect makes bitcoin somewhat similar to a stock that is held for investment purposes. Given the dual nature of bitcoin as currency and an investment vehicle, there are two types of situations in which a taxpayer would realize a gain (or perhaps a loss) from a bitcoin transaction. First, the bitcoin may be held as an investment and then directly sold into the bitcoin marketplace. Second, a gain or loss may be realized when bitcoin is purchased and later used to purchase another type of property. For example, the value of a bitcoin that a taxpayer purchases for $60,000 may increase to $80,000. The taxpayer then uses the bitcoin to purchase equipment for $80,000. This transaction presumably would create a $20,000 gain that would be included in the Illinois corporation income tax base. Because the GIL was limited in scope, it is not clear whether the $20,000 net gain amount reflected in the Illinois base would be included in the sales factor, or whether the full $80,000 in gross receipts would be included. Furthermore, it is unclear whether the inclusion amounts might differ when the virtual currency is sold in the marketplace for cash versus using the virtual currency to purchase tangible property.

The GIL provides some clarity for taxpayers that purchase bitcoin but also may be valuable as an example of how the Department analyzes sales factor issues involving intangible property. While the Department accepted the taxpayer’s classification of bitcoin as intangible personal property outside the scope of a patent, copyright or like intangible, the ruling section of the GIL only provides quotations of statutory and regulatory language and does not present a separate analysis. While not specifically requested by the taxpayer, the GIL may have been an opportunity for the Department to provide further guidance regarding the apportionment of gain from sales of virtual currency compared to gain realized when the virtual currency is used to purchase tangible property, along with the potential applicability of the dealer provisions to virtual currency dealers.



1 General Information Letter IT-21-0004, Illinois Department of Revenue, Aug. 31, 2021 (released Oct. 2021). A general information letter is designed to provide general information, but it is not a statement of Department policy and is not binding on the Department.
2 Notice 2014-21, 2014-16 I.R.B. 938.
3 A convertible virtual currency has an equivalent value in real currency or acts as a substitute for real currency. Id.
4 Id.
5 35 ILL. COMP. STAT. 5/304(h)(3).
6 35 ILL. COMP. STAT. 5/304(a)(3)(C-5)(iii); ILL. ADMIN. CODE tit. 86 § 100.3370(c)(7)(C).
7 Specifically, sales from intangible property are sourced to Illinois if the income-producing activity is performed wholly within the state or, if the income-producing activity is performed both within and without Illinois, if a greater portion of the income-producing activity is performed within Illinois than in any other state, based on costs of performance. Id.
8 Id. Under IRC Sec. 475, a “dealer in securities” is defined as a taxpayer who: (i) regularly purchases securities from or sells securities to customers in the ordinary course of a trade or business; or (ii) regularly offers to enter into, assume, offset, assign or otherwise terminate positions in securities with customers in the ordinary course of a trade or business. “Security” means any share of stock in a corporation. The GIL includes the statutory provisions for dealers, but it does not expressly address their applicability to bitcoin transactions. These provisions conceivably could apply to bitcoin dealers and substantially change the sourcing method required to be used for purposes of the sales factor calculation.
9 ILL. ADMIN. CODE tit. 86 § 100.3370(c)(7)(C)(ii).
10 35 ILL. COMP. STAT. 5/102.
11 35 ILL. COMP. STAT. 5/304(a)(3)(B-1)(i); ILL. ADMIN. CODE tit. 86 § 100.3370(c)(3).
12 35 ILL. COMP. STAT. 5/304(a)(3)(B-2); ILL. ADMIN. CODE tit. 86 § 100.3370(a)(2)(F).
13 Technical Advisory Memorandum TAM-2015-1(R), New Jersey Division of Taxation, July 28, 2015.
14 TSB-M-14(5)C, TSB-M-14(7)I, TSB-M-14(17)S, New York Department of Taxation and Finance, Dec. 5, 2014.
15 Tax Bulletin No. 213, Wisconsin Department of Revenue, April 2021.



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