For Illinois income-tax apportionment purposes, is bitcoin treated as intangible personal property, and is it treated like a patent, copyright, or trademark?

Subject

Apportionment-Virtual Currency.

Plain-English summary

A taxpayer asked the Illinois Department of Revenue for a General Information Letter (GIL) confirming how bitcoin should be classified under Illinois's income-tax apportionment statute, 35 ILCS 5/304. The taxpayer's letter described bitcoin as "a digital representation of value that functions as a medium of exchange, a unit of account and/or a store of value," tracked on a decentralized blockchain ledger, and noted that the IRS treats convertible virtual currency as property rather than currency (IRS Notice 2014-21).

The taxpayer asked two things: (1) confirm that bitcoin is "intangible personal property" under the apportionment statute and its regulations, and (2) assuming it is intangible property, confirm that it is not a "patent, copyright, trademark, or similar item of intangible property" under 35 ILCS 5/304(a)(3)(B-1) and (B-2).

The Department agreed with both points. It ruled that bitcoin is treated as an item of "intangible personal property" for purposes of 35 ILCS 5/304 and 86 Ill. Adm. Code 100.3370, because bitcoin can ordinarily be resold or reconveyed by whoever acquires it and is not tangible. But the Department also ruled that bitcoin is not a "patent, copyright, trademark, or similar item of intangible property," because it is not registered (or eligible to be registered) as a patent, copyright, or trademark under the U.S. Code.

This matters because Illinois's apportionment statute has a special rule for patents, copyrights, trademarks, and "similar" intangibles: gross receipts from licensing or selling those items can only be counted in the sales-factor fraction if such receipts make up more than 50% of the taxpayer's total gross receipts for the current year and each of the two preceding years (35 ILCS 5/304(a)(3)(B-2)). Because bitcoin doesn't fall into that special category, its sourcing instead falls under the general intangible-property sourcing rules in 35 ILCS 5/304(a)(3)(C-5)(iii) and 86 Ill. Adm. Code 100.3370(c)(7).

As the letter itself states, this is a GIL, not a Private Letter Ruling. It is not a statement of Department policy and is not binding on the Department (86 Ill. Adm. Code 1200.120(b) and (c)).

What this means for you

Businesses that hold, trade, or receive bitcoin

If your business has apportionable Illinois income tied to bitcoin transactions, this GIL indicates the Department views bitcoin as intangible personal property for sourcing gross receipts under 35 ILCS 5/304, not as a patent/copyright/trademark-type asset. That means the special 50%-of-receipts threshold in 35 ILCS 5/304(a)(3)(B-2) does not apply to your bitcoin receipts — instead, general intangible-property sourcing rules (such as 35 ILCS 5/304(a)(3)(C-5)(iii), which looks to the customer's location or, for dealers, to the location of the income-producing activity) would govern.

Accountants and tax professionals

The letter's reasoning leans on two threads: (1) the Department's regulation defining "intangible personal property" as an item that "can ordinarily be resold or otherwise reconveyed by the person acquiring the item from the taxpayer" (86 Ill. Adm. Code 100.3370(c)(6)(C)(ii)), and (2) the statutory instruction that Illinois Income Tax Act terms generally carry "the same meaning as when used in a comparable context in the Internal Revenue Code" (35 ILCS 5/102), combined with the IRS's position that virtual currency is property. The letter also references the Department's separate sales-tax GIL, IT 18-0025-GIL, which found certain "tokens" similar to bitcoin were intangible property for sales-tax purposes — though that letter addressed a different tax entirely.

Anyone relying on this letter

Because this is a General Information Letter rather than a Private Letter Ruling, it does not bind the Department and is not a statement of Department policy. It illustrates how the Department currently reasons about bitcoin's classification, but a taxpayer who wants a binding answer on their own specific facts would need to request a Private Letter Ruling under 2 Ill. Adm. Code 1200.110.

Common questions

Q: Does Illinois treat bitcoin as intangible personal property for apportionment purposes?
A: Yes. The Department confirmed that bitcoin is an item of "intangible personal property" under 35 ILCS 5/304 and 86 Ill. Adm. Code 100.3370, because it can ordinarily be resold or reconveyed and is not tangible.

Q: Is bitcoin treated like a patent, copyright, or trademark for sourcing gross receipts?
A: No. The Department ruled that bitcoin is not a "patent, copyright, trademark, or similar item of intangible property," because it isn't registered (or eligible for registration) as one under the U.S. Code. So the special 50%-of-gross-receipts sourcing rule in 35 ILCS 5/304(a)(3)(B-2), which applies specifically to those items, does not apply to bitcoin.

Q: How is bitcoin income actually sourced for the sales factor, then?
A: The letter points to the general sourcing rules for intangible personal property, including 35 ILCS 5/304(a)(3)(C-5)(iii) and 86 Ill. Adm. Code 100.3370(c)(7). The letter does not walk through a full sourcing example for a specific bitcoin transaction — it addresses only the classification questions the taxpayer asked.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter issued under 86 Ill. Adm. Code 1200.120(b) and (c), which by its own terms is "not a statement of Department policy and is not binding on the Department." A taxpayer seeking a binding answer on their specific facts would need a Private Letter Ruling instead.

Q: Does this letter address other virtual currencies besides bitcoin?
A: The letter's request and ruling are framed specifically around bitcoin. It references a separate GIL (IT 18-0025-GIL) that found certain "tokens" with a function similar to bitcoin were intangible property for sales-tax purposes, but this letter's own holding is limited to bitcoin for income-tax apportionment purposes.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2021/it21-0004-gil.pdf

Original ruling text

IT-21-0004 08/31/2021 Apportionment-Virtual Currency.

For purposes of Section 304 of the IITA and accompanying regulations,
bitcoin is considered “intangible personal property.” Bitcoin is not
considered a “patent, copyright, trademark, or similar item of intangible
property” to which 35 ILCS 5/304(a)(3)(B-1) and (B-2) and accompanying
regulations would apply. (This is a GIL.)

August 31, 2021
Re: _ Illinois Income Tax
Dear NAME:

This is in response to your letter dated April 28, 2020, in which you request
information regarding Illinois income tax. The nature of your request and the
information you have provided require that we respond with a General
Information Letter, which is designed to provide general information, is not a
statement of Department policy and is not binding on the Department. See 86 Ill.
Adm. Code 1200.120(b) and (c), which may be found on the Department's web
site at www.tax. illinois.gov.

Your letter states as follows:

We respectfully request a General Information Letter on the
Classification of bitcoin for purposes of 35 ILCS § 5/304 (the “Illinois
apportionment statute”). Specifically, please confirm that bitcoin is an item
of “intangible personal property" as that term is used in the Illinois
apportionment statute and accompanying regulations. Assuming bitcoin is
intangible property please confirm it is not a ‘patent, copyright trademark
or similar item of intangible property" for purposes of the same statute and
accompanying regulations.

For purposes of this request, 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 is not considered coin or paper money issued by the
United States or coin or paper money of any government.' Transactions
involving bitcoin are typically stored and verified on a digital distributed
ledger known as the bitcoin blockchain technology. This ledger records
and organizes transactions involving bitcoin in "blocks ' of data that are
chained" together using cryptography to secure the record and prove the
identities of the parties to the transaction. Bitcoin's blockchain technology
is decentralized meaning that the data from the digital ledger is maintained
and stored on numerous servers and hard drives in various locations of
unrelated person rather than in one central data center.

' Notice 2014-21, 2014-16 LR.B. 938.

Bitcoin may be used to purchase goods or services, or purchased
and held as an investment. However, bitcoin does not confer an
ownership interest in anything other than itself. Although specific guidance
has not been promulgated with respect to bitcoin, the Internal Revenue
Service ("IRS") has determined that convertible virtual currency “is treated
as property” rather than as currency, and “[g]Jeneral tax principles
applicable to property transactions apply to transactions using virtual
currency.”2

Issue 1: Bitcoin is considered "intangible personal property” for
purposes of the of the Illinois apportionment statute.

The Illinois apportionment statute and accompanying regulations
provide specific sourcing rules for items of intangible personal property.*
Illinois Department of Revenue ("Department") regulations addressing
apportionment provide 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 taxpayerf...]."4 In
application, the Department has interpreted the term "intangible" in this
context expansively to cover items such as event tickets, software, and
membership interests.° Additionally, the Department issued a General
Information Letter that provides certain "tokens" that have a similar
function to bitcoin described herein are items of intangible property for
sales tax purposes. ®

Moreover, Illinois generally requires that "any term used in [the
Illinois Income Tax Act] shall have the same meaning as when used in a
comparable context in [the Internal Revenue Code] in effect for the taxable
year."’ The IRS confirmed that convertible virtual currency "is treated as
property"; and, as bitcoin (and other convertible virtual currency) clearly is
not tangible, it must therefore be intangible "property."®

Here, bitcoin can be ordinarily resold or otherwise reconveyed by
the person acquiring the item, and is not tangible in nature. Accordingly,
please confirm that the Department treats bitcoin as intangible property for
purposes of the Illinois apportionment statute and accompanying
regulations.

2 Td.

3 See 35 ILCS § 5/304(a)(3)(C-5)(iii); 86 Ill. Admin. Code 100.3370(c)(6)(C)(ii).

4 86 Ill. Admin. Code 100.3370(c)(6)(C)(ii).

See, e.g., 86 Ill. Admin. Code 100.3370(c)(6)(C); General Information Letter IT 08-0031-GIL (Oct. 8,
2008); General Information Letter IT 08-0028-GIL (Sept. 19, 2008).

® See General Information Letter IT 18-0025-GIL (Sept. 13, 2018).

735 ILCS § 5/102.

8 Notice 2014-21, 2014-16 LR.B. 938.

Issue 2: Bitcoin is not considered a patent, copyright, trademark, or
similar item of intangible personal property.

The Illinois apportionment statute provides that "[g]ross receipts
from the license, sale, or other disposition of patents, copyrights,
trademarks, and similar items of intangible personal property...may be
included in the numerator or denominator of the sales factor only if gross
receipts from licenses, sales, or other disposition of such items comprise
more than 50% of the taxpayer's total gross receipts included in gross
income during the tax year and during each of the 2 immediately
preceding tax years[.]"° Illinois regulations generally define “patents,”
"copyrights," and "trademarks" as items registered or eligible to be
registered under applicable provisions of the U.S. Code, and define a
"similar item" of intangible property as "an item of intellectual property that
is registered or otherwise enforceable under a law equivalent to 35 USC
151, 17 USC 408 or 15 USC 1051 or that is otherwise recognized in the
country under whose law the sale or license agreement would be
enforced, or under which an infringement claim would be brought."'°

Bitcoin is not registered as a patent, trademark, copyright or other
similar item of intellectual property under the U.S. Code. Accordingly,
please confirm that bitcoin would not be treated as a patent, trademark,
copyright or similar item of intangible property for purposes of the Illinois
apportionment statute.

RULING

35 ILCS 5/304 and 86 III. Adm. Code 100.3370 provide specific sourcing rules for
items of intangible personal property. 35 ILCS 5/304(a)(3) states, in pertinent
part, as follows:

(3) Sales factor.

(A) The sales factor is a fraction, the numerator of which is the total
sales of the person in this State during the taxable year, and the
denominator of which is the total sales of the person everywhere during
the taxable year.

(B-1) Patents, copyrights, trademarks, and similar items of
intangible personal property.

(i) Gross receipts from the licensing, sale, or other
disposition of a patent, copyright, trademark, or similar item of

935 ILCS § 5/304(a)(3)(B-2), see also 86 Ill. Admin. Code 100.3370(a)(2)(F).
10 86 TI. Admin. Code 100.3370(a)(2)(F)(v)-(viii).

intangible personal property, other than gross receipts governed by
paragraph (B-7) of this item (3), are in this State to the extent the
item is utilized in this State during the year the gross receipts are
included in gross income.

(B-2) Gross receipts from the license, sale, or other disposition of
patents, copyrights, trademarks, and similar items of intangible personal
property, other than gross receipts governed by paragraph (B-7) of this
item (3), may be included in the numerator or denominator of the sales
factor only if gross receipts from licenses, sales, or other disposition of
such items comprise more than 50% of the taxpayer's total gross receipts
included in gross income during the tax year and during each of the 2
immediately preceding tax years; provided that, when a taxpayer is a
member of a unitary business group, such determination shall be made on
the basis of the gross receipts of the entire unitary business group.

(C-5) For taxable years ending on or after December 31, 2008, sales,
other than sales governed by paragraphs (B), (B-1), (B-2), (B-5), and (B-7), are in
this State if any of the following criteria are met:

(iii) In the case of interest, net gains (but not less than zero) and
other items of income from intangible personal property, the sale is in this
State if:

(a) in the case of a taxpayer who is a dealer in the item of
intangible personal property within the meaning of Section 475 of
the Internal Revenue Code, the income or gain is received from a
customer in this State. For purposes of this subparagraph, a
customer is in this State if the customer is an individual, trust or
estate who is a resident of this State and, for all other customers, if
the customer's commercial domicile is in this State. Unless the
dealer has actual knowledge of the residence or commercial
domicile of a customer during a taxable year, the customer shall be
deemed to be a customer in this State if the billing address of the
customer, as shown in the records of the dealer, is in this State; or
(b) in all other cases, if the income-producing activity of the
taxpayer is performed in this State or, if the income-producing
activity of the taxpayer is performed both within and without this
State, if a greater proportion of the income-producing activity of the
taxpayer is performed within this State than in any other state,
based on performance costs.

86 Ill. Adm. Code 100.3370(c)(7) provides, in pertinent part, as follows:

7) For taxable years ending on or after December 31, 2008, gross
receipts from transactions not governed by the provisions of
subsection (c)(1), (2), (3), (4), (5) or (6) are in this State if any of the
following criteria are met:

ii) For purposes of this subsection (c)(7)(C), 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,
and does not include any obligation of the taxpayer to
make any payment, perform any act, or otherwise
provide anything of value to another person.

For the purposes of 35 ILCS 5/304 and 86 Ill. Adm. Code 100.3370, the
Department treats bitcoin as an item of “intangible personal property.” Likewise,
for the purposes of 35 ILCS 5/304 and 86 III. Adm. Code 100.3370, the
Department does not consider bitcoin a “patent, copyright, trademark, or similar
item of intangible property.”

As stated above, this is a general information letter which does not constitute a
statement of policy that applies, interprets or prescribes the tax laws, and it is not
binding on the Department. If you are not under audit and you wish to obtain a
binding Private Letter Ruling regarding your factual situation, please submit all of
the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions regarding this letter, you may contact me at (217) 782-
2844.

Sincerely,

Michael D. Mankowski
Associate Counsel (Income Tax)

cc: Daily File
Correspondence file:

IT-20-GC-0033-GIL