Fed Proposes Bitcoin Tax to Protect Deficits

To keep budget deficits in check, a new study from the Federal Reserve Bank of Minneapolis recommends taxing or outright banning assets like Bitcoin.

The Federal Reserve Bank of Minneapolis is recommending that governments either heavily tax or ban assets like Bitcoin to prevent the cryptocurrency from destabilizing fiscal policy.

In a working paper released on Oct. 17, the Minneapolis Fed argued that the introduction of Bitcoin creates problems for an economy in which the government is attempting to implement policies that permanently maintain primary deficits through nominal debt.

The Fed warned that an asset like Bitcoin might lead to a “balanced budget trap,” a situation in which the government is forced to maintain a balanced budget.

The researchers gave the example of Bitcoin as a “private-sector security” with a fixed supply that lacks “real resource claims.” Bans or taxes would be the best way to solve this conundrum, they claimed, according to Cointelegraph.

“A legal prohibition against Bitcoin can restore unique implementation of permanent primary deficits, and so can a tax on Bitcoin,” the economists wrote in the paper.

A primary deficit occurs when tax and other revenue collections fall short of spending, excluding interest payments on debt. When describing the primary deficit, the term “permanent” is used to indicate that the government intends to continue spending more than it collects indefinitely.

The total amount of the United States’ accumulated national debt is $35.7 trillion. However, the primary deficit — the annual gap between spending and tax collections — currently stands at around $1.8 trillion.

As interest rates and debt used to finance the government rise, interest payments on Treasury debt increased by 29% to $1.13 trillion, Reuters reported on Oct. 19. This will be the largest deficit outside the COVID-19 era.

In a comment posted on Oct. 21, Matthew Sigel, head of digital asset analysis at VanEck, noted that the Minneapolis Fed joined the European Central Bank in its criticism of Bitcoin, adding that the institution “fantasizes about ‘legal prohibition’ and extra taxes on BTC to ensure govt debt remains the ‘only risk-free security.’”

Meanwhile, Dan McArdle, co-founder of Messari, highlighted a paper titled “Money is Memory” from 1996 published by the Minneapolis Fed. In an interesting twist, this article argued in favor of Bitcoin twelve years before its creation.

The article claimed that money is “analogous to a primitive technology of memory,” “available in fixed supply” and does not “enter production.”

The European Central Bank also joined in on criticizing Bitcoin in a document published on Oct. 12, arguing that early Bitcoin holders are enriched at the expense of later participants. It contended that the asset’s price is set by a collective hallucination, and the authority should either cap the price or ban the cryptocurrency to prevent further regulation.

Jürgen Schaaf, an adviser to the ECB’s senior management, added to the chorus of arguments against Bitcoin in a post on Oct. 20 on X, arguing that there are “strong reasons to advocate for policies that curb Bitcoin’s growth or even eliminate it.”

“Non-holders should realize that Bitcoin's rise is fueled by a wealth redistribution to the early birds at their expense,” he said.