IRS Data Analytics Demonstrating Cryptocurrency Transactions Not as Anonymous as People Think

Chris Gaetano
Published Date:
Jun 28, 2021

In pursuit of tax evaders, the IRS has been turning to sophisticated data analytics to track  cryptocurrency transactions, which many users have thought of as mostly anonymous, Accounting Today reported.

A lot of it has to do with the fact that while digital currencies are hotly traded, in general, if users want to actually buy something with them, the currencies must be converted into sovereign currency, and that act then puts the users on the IRS radar. From there, the service can follow the money trail and eventually track who is spending it, as well as where and when. Considering that a blockchain is a record of every transaction that has ever taken place using the cryptocurrency, in fact, if a transaction can be traced to a person, then there's even more to trace. Essentially, even a token has no identity technically attached to it, its movements still create data that can be applied to narrow down the holder.

Authorities' growing skill at tracking digital currency is reflected in the announcement earlier this month that most of the Bitcoin used to pay off the ransomware infecting the Colonial Pipeline had been recovered. The DOJ at the time said that it reviewed the Bitcoin public ledger to track multiple transfers and identify that approximately 63.7 bitcoins, representing the proceeds of the victim’s ransom payment, had been transferred to a specific address. While the DOJ didn't specify exactly how, it was eventually able to obtain the private key (functionally, the password) to the account and seize the digital assets.

While there is also international cooperation on the matter, countries struggle with differing rules, regulations and even definitions of cryptocurrency. Domestically, the White House is seeking to further bolster authorities' ability to track digital currency via third-party reporting from institutions such as banks and exchanges. Meanwhile, it is also working to hire tech specialists who could bring new techniques to bear.

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