The Internal Revenue Service has been using a special software tool to identify Bitcoin tax evaders since 2015.
Cryptocurrencies were designed to be highly anonymous; however, using Chainalysis software, the IRS can unmask Bitcoin tax cheats, which is making Bitcoin users uneasy.
Chainalysis is a startup that uses a “Reactor” tool to identify, track and analyze digital currency transactions—particularly using Bitcoin.
According to a document obtained by The Daily Beast through the Freedom of Information Act (FOIA), the purpose of using the tool is to trace all transactions in the entire Bitcoin economy.
This decision by the IRS is part of the agency’s larger campaign to identify digital currency users who do not pay taxes.
It turns out that you can use Bitcoin at any time, but you cannot hide from the tax authorities.
There is an increasing dominance of cryptocurrencies operating within the banking and finance sector.
There’s also an unfolding potential application of digital currencies in the healthcare (electronic medical records), manufacturing (supply chain management) and entertainment (gaming, music and video streaming) industries.
The worldwide digital currency trend is best known to offer anonymity to users making financial transactions without wishing to reveal their identity.
However, it seems people cannot hide their wealth anymore, which might cause concern for investors.
Chainalysis’ Bitcoin tracking software tool, which is also being used by banks, law enforcement agencies and regulatory entities, can follow Bitcoin transactions from one wallet to another until the user cashes out into dollars or any other currency.
This makes it possible for the IRS to follow digital currencies, and identify and obtain evidence on tax frauds and other federal crimes committed by Bitcoin users.
According to a claim by the IRS, only 802 Bitcoin users declared their profits and losses in the year 2015; which is a small figure compared to the actual number of Americans investing in cryptocurrencies.
Presently, the value of Bitcoin is hitting above the $4,000 mark, and is expected to continue rising.
Law enforcement is therefore not only concerned with the increasing number of Bitcoin-related crimes—such as hacking and selling drugs—but they’re also concerned with those who use Bitcoin to hide their wealth and avoid paying taxes.
The IRS has been targeting leading Bitcoin companies and exchanges including Coinbase, the $1.6 billion Bitcoin wallet and currency exchange platform.
The IRS is seeking to reveal investments, sensitive financial information and user accounts.
Coinbase Founder and CEO Brian Armstrong has stated that the agency is demanding the data of user accounts, which might produce negative impacts on the entire cryptocurrency industry.
The intricacies and technical specifications of the Chainalysis software used by IRS remain disclosed, but it might impact the security and privacy of Bitcoin exchanges and digital wallet platforms.
However, many cryptocurrency experts say that the IRS’ efforts will likely be ineffective and unproductive, as users and investors who wish to conceal their wealth will move to more anonymous digital currencies such as Zcash or Monero.