According to a contract recently obtained by the Daily Beast, the IRS can now track bitcoin and other cryptocurrency addresses. They can do this to route out potential tax evaders. They purchased software from the blockchain analysis group Chainalysis.
The document details that “criminals” have used digital currencies to launder money, deal drugs, and commit other unlawful behavior. However, criminals have also been using digital currencies to ignore tax liabilities and evade responsibility. The Daily Beast article elaborated:
“The document highlights how law enforcement isn’t only concerned with criminals accumulating bitcoin from selling drugs or hacking targets, but also those who use the currency to hide wealth or avoid paying taxes”.
Reason for IRS Crackdown; Tracking Bitcoiners
The reason the IRS is cracking down on digital currencies appears to be because only 802 people declared bitcoin profits or losses in 2015. The Daily Beast article suggests that many people may have not expected the IRS to collect on digital currencies. Others may have just thought they could easily sidestep this alleged obligation.
As a result of this failure to pay taxes, the IRS consulted with Chainalysis. They are now providing the IRS with tools to track bitcoin addresses through the blockchain and centralized exchanges.
The tool that Chainaylsis gave the IRS is called a refactor tool. It visualizes, tracks, and analysis transactions on the blockchain. Agencies from law enforcement, IRS, and banks will be able to use the tool, according to sources. To date, records show the IRS has paid Chainaylsis $88,700 since 2015 for its services.
Tax Evaders and “Criminals” are Adapting; Coinbase Case
Even though the IRS and companies such as Chainalysis are starting to hunt down blockchain users for evading taxes, enterprising individuals are adapting. They are now starting to use blockchains and cryptocurrencies that undermine current analytic techniques. For instance, the Wannacry hacker group supposedly moved their funds over into Monero to evade detection by law enforcement. Other crypto users may decide to use Zcash, which also employs more private and anonymous transaction measures.
In the past, the IRS has used multiple outlets to capture tax evaders using bitcoin. They have already tried to legally force Coinbase to hand over customer information. Currently, it looks like Coinbase may surrender customer data for those who exchanged over $20,000 worth of bitcoin on the platform. No telling what the court will rule in the end. News.Bitcoin.com covered the case in June:
“The IRS will no longer target a wide-range of Coinbase users via its information request, which it filed on Coinbase back in March. Instead, the agency made concessions to seek account data of individuals who transacted — meaning they bought, sold, sent, or received — $20,000 worth of bitcoin in any transaction type”.