The IRS Has Special Software to Find Bitcoin Tax Cheats
One benefit of using bitcoin is the digital currency can be anonymous—its owners can move money around the world without revealing who they are. Well, in theory at least. In reality, bitcoin is less secret than people think.
The latest reminder of this comes via a report that the Internal Revenue Service is using software to unmask bitcoin users who have failed to report profits. According to a contract unearthed by the Daily Beast, the IRS is paying a company called Chainalysis to help identify the owners of digital “wallets” that users employ to store their bitcoins.
In a letter to the IRS, the co-founder of Chainalysis says the company has information on 25 percent of all bitcoin addresses and that it deploys millions of tags to help track and identify transactions. Here is a screenshot of a paragraph from the letter:
The decision by the IRS to license the software of Chainalysis, which is based in Switzerland with an office in New York, appears to be part of the agency’s larger campaign to target digital currency users who have failed to pay tax.
As Fortune reported earlier this year, the IRS claims only 802 people declared a capital gain or loss related to bitcoin in 2015. This is significant since the price of bitcoin soared from around $13 to over $1100 between 2013 and 2015, and hundreds of thousands (like millions) of Americans bought and sold digital currency during this time—in other words, there are many people who face bitcoin-related tax trouble, and the IRS is tracking some of them down.
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There are indications, though, the IRS is focusing only on the bigger fish. For instance, in the agency’s ongoing legal battle with the popular digital currency exchange, Coinbase, the IRS recently agreed to limit its request for customer records only to accounts with transactions over $20,000.
Nonetheless, the IRS’s use of the Chainalysis software is likely to make some bitcoin owners uneasy. Meanwhile, on bitcoin forums, some users have expressed resentment against exchanges like Coinbase, Kraken, and Mt. Gox for allegedly storing wallets in such a way that analytic companies like Chainalysis or BitSeer can identify individual users.
The forum chatter also shows some bitcoin users are thinking of switching to other digital currencies like Monero that are harder to trace.
Finally, the existence of tools like Chainalysis doesn’t mean bitcoin users can’t be anonymous. Those who wish to keep their identity concealed can do so by maintaining their own wallet and avoiding exchanges that collect customer information.
This is part of Fortune’s new initiative, The Ledger, a trusted news source at the intersection of tech and finance.