Critics, including VanEck’s Matthew Sigel, argue that the Fed's proposal was only made in an attempt to suppress Bitcoin in favor of government-controlled securities. Meanwhile, Japan's Democratic Party for the People (DPP) is pushing for a crypto tax cut to boost Web3 development, though it faces some political challenges. In India, legal expert Amit Kumar Gupta criticized the country’s harsh crypto tax policies, and claimed that they slow down blockchain innovation.
Bitcoin Seen as Threat to Government Debt Management
A recent research paper that was released by the Federal Reserve Bank of Minneapolis started a debate by suggesting that assets like Bitcoin should be taxed or banned to help governments maintain permanent budget deficits. The paper was published on Oct. 17, and argues that Bitcoin creates challenges for policy implementation in an economic framework where a government seeks to sustain ongoing deficits through nominal debt.
Specifically, Bitcoin introduces what the Fed calls a "balanced budget trap." This is a scenario where the government may be compelled to balance its budget.
The researchers used Bitcoin as an example of a fixed-supply "private-sector security" that lacks "real resource claims." They concluded that addressing this issue could involve banning Bitcoin outright or imposing taxes on it to restore the feasibility of maintaining permanent primary deficits. According to the paper, measures like these will help governments avoid being forced into budgetary constraints.
A primary deficit happens when a government’s expenditures exceed its revenues, excluding interest payments on existing debt. When this deficit is described as "permanent," it implies a continued policy of spending more than what is collected in taxes. Currently, the US faces a massive total national debt of $35.7 trillion, while its primary deficit—the annual shortfall between spending and tax revenue—stands at around $1.8 trillion.
To complicate things even more, a recent report from Reuters pointed out that the fiscal year 2024 deficit surged, and reached levels not seen since the Covid-19 pandemic. This was largely due to a 29% increase in interest payments on Treasury debt, driven by higher rates and increased borrowing.
The suggestion to tax or ban Bitcoin received a lot of backlash from many people in the digital asset space. Matthew Sigel, the head of digital asset research at VanEck, commented that the Minneapolis Fed aligned itself with the European Central Bank in its stance against Bitcoin. He criticized the proposal,and accused the Fed of "fantasizing" about using legal prohibitions and extra taxes on Bitcoin to maintain government debt as the "only risk-free security."
Interestingly, Messari co-founder Dan McArdle drew a parallel between a 1996 paper from the Minneapolis Fed that is titled "Money is Memory." The paper was written 12 years before Bitcoin's creation, and described money as an object with a fixed supply that does not "enter production," drawing a conceptual link to Bitcoin's characteristics.
These discussions happened after a similar call from the European Central Bank (ECB). On Oct. 12, the ECB released a paper that suggested older Bitcoin holders are benefitting at the expense of new investors, and recommended that the cryptocurrency should either be strictly regulated to prevent its price from rising or be banned entirely. Jürgen Schaaf, who is an adviser at the ECB, agreed with these sentiments in an Oct. 20 post. In the post, he advocated for policies to stop Bitcoin's growth because of concerns that non-holders are losing out due to the wealth redistribution resulting from Bitcoin's appreciation.
Japan’s DPP Pitches Crypto Tax Cut
Taxing cryptocurrencies is not just a hot topic in the States. Yuichiro Tamaki, the leader of Japan’s Democratic Party for the People (DPP), put forward a proposal to lower the tax rate on crypto gains to 20% if he gets elected.
Tamaki announced the plan in a translated X post on Oct. 20, and urged voters who support the idea to cast their votes for the DPP. Under the proposed tax policy, crypto assets will be taxed separately at 20%, which aligns the rate with the taxes paid on stock market profits. The plan also includes a provision to exclude the exchange of one crypto asset for another from triggering a taxable event.
Despite the proposal’s potential appeal to the crypto community, it still faces some serious hurdles. The DPP currently holds only seven out of 465 seats in Japan’s House of Representatives. The party's limited representation in the government makes it very unlikely that the tax plan will actually be implemented in the near future.
In a conversation with an X user named Shonai Dog, Tamaki indicated that the DPP might consider tax cuts for other forms of financial income in the future as well. However, for now, the focus is still on strengthening Japan’s position in the Web3 industry. Tamaki also shared his party’s goal to establish the country as a leader in the Web3 space.
However, recent opinion surveys suggest that the party’s chances of securing a win are slim. According to a poll by local news outlet Mainichi, the DPP is unlikely to secure a victory. The ruling Liberal Democratic Party and its coalition partner Komeito are expected to retain their majority. On the bright side, the DPP could see its seat count increase to reach up to 20 seats.
The issue of crypto taxation has been gaining attention in Japan. On Aug. 30, the Financial Services Agency unveiled plans to overhaul the country's tax code by 2025, which may include lowering taxes on crypto assets. Currently, crypto gains in Japan are classified as miscellaneous income, with tax rates ranging from 15% to 55%, depending on an individual’s total income.
How Japan taxes crypto (Source: KoinX)
Those earning more than 40 million Japanese yen, or approximately $268,000, face the highest tax rate. In contrast, profits from stock trading get taxed at a maximum rate of 20%. For corporations holding crypto, a flat tax rate of 30% is applied to their holdings at the end of the financial year, regardless of whether they made a profit.
India’s Crypto Tax Regime Under Fire
At the Peer-to-Peer Financial Systems Workshop 2024, Amit Kumar Gupta, a legal practitioner at the Supreme Court of India and the Indian Institute of Technology-Kanpur, criticized India’s crypto tax policy as an attempt to slow down blockchain and crypto adoption. In his research paper on crypto taxation, Gupta argued that the country’s heavy tax regime on digital assets stems from a fundamental misunderstanding of the technology by regulators, who see it mostly as a tool for illegal activities like money laundering and terrorist financing.
India's current crypto tax law has been effective since April 1 of 2022, and imposes a 30% tax on profits from digital asset transactions without allowing users to offset any losses. Additionally, each individual crypto transaction is subject to taxation, which Gupta described as "draconian."
He believes the policy is intended to discourage the use of cryptocurrencies because the government considers them "worse than gambling." According to Gupta, the authorities have also not taken any steps to provide a clear regulatory framework. Instead, it imposed restrictive conditions that make it very difficult for businesses to operate in the country. As a result, he claimed that many entrepreneurs, traders, and developers involved in the crypto and blockchain space are choosing to relocate to more favorable jurisdictions.
Despite these challenges, India is still home to ongoing Web3 development. Rohit Mohan, the CEO of India-based Web3 marketing firm NC Global Media, pointed out that while the country’s stance on crypto is cautious, developers are still making a lot of progress. Mohan suggested that with the right approach to collaboration and user education, India could potentially become a global leader in setting an example for responsible crypto adoption.
