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Can the Government Track Crypto?

By Jinia09/26/2023

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Do you ever wonder if the government can track your cryptocurrency transactions? 

The short answer is yes, they can.

The Internal Revenue Service (IRS), the governing body responsible for tax collection in the United States, has developed various methods to track cryptocurrency activities. 

Major cryptocurrency exchanges operating in the US, such as Coinbase, Kraken, and Gemini, must report users’ transactions to the IRS through 1099 forms. This means that your cryptocurrency transactions on these exchanges are not private and can be monitored by the government.

However, some exchanges do not require Know Your Customer (KYC) information and do not send 1099 forms, making it more challenging for the IRS to track these transactions. 

Nevertheless, the IRS and other major government bodies across the globe have methods they can use to analyze public blockchain transactions, including Non-Fungible Token (NFT) transactions, through contractors like Chainalysis.

Can the Government Track Crypto?

Apart from putting out regulatory requirements for centralized exchanges to issue KYC to their customers, regulators and the tax man keep track of your Bitcoin through contractors like Chainalysis.

These contractors are able to analyze public blockchain transactions and match anonymous wallets to known investors. This allows them to track cryptocurrency transactions and identify the individuals behind them.

It’s important to note that cryptocurrency transactions on blockchains like Bitcoin and Ethereum are publicly visible, which allows the IRS to track them by matching anonymous transactions to known individuals.

Therefore, it is recommended to comply with tax obligations and accurately report cryptocurrency transactions to avoid potential penalties and audits.

Reporting Requirements for Exchanges

To ensure compliance with tax regulations, you must be aware of the reporting requirements imposed on cryptocurrency exchanges.

Major exchanges operating in the US, such as Coinbase, Kraken, Gemini, Crypto.com, Binance.US, Robinhood, and PayPal, are required to report cryptocurrency transactions to the IRS through 1099 forms. These forms provide information about the transactions, including the amount and type of cryptocurrency involved.

However, it’s important to note that not all exchanges have the same reporting obligations. Smaller exchanges, like KuCoin, MexC, and HODL HODL, don’t require Know Your Customer (KYC) information and don’t send 1099 forms.

Non-KYC Exchanges

Meanwhile, some cryptocurrency exchanges operate without the need for Know Your Customer (KYC) information, allowing users to maintain their anonymity and avoid the IRS reporting requirements. Exchanges such as KuCoin, MexC, and HODL do not require users to provide KYC information when signing up.

This means that users can trade cryptocurrencies without disclosing their personal information, making it difficult for the government to track their transactions. However, it’s important to note that while these exchanges currently don’t collect KYC information, their policies may change in response to government pressure.

It’s also worth considering that even though transactions on these exchanges aren’t directly reported to the IRS, the agency can still analyze public blockchain transactions and employ techniques to trace anonymous wallets back to known individuals. 

Public Blockchain Transactions

Participating in public blockchain transactions exposes your cryptocurrency activities to potential scrutiny and analysis by the IRS and other governing bodies. 

Public blockchains like Bitcoin and Ethereum allow for the visibility of transaction details, including sender and recipient addresses, transaction amounts, and timestamps.

The IRS utilizes this transparency to track and investigate cryptocurrency transactions. They can analyze these public blockchain transactions and employ sophisticated tools and techniques to identify anonymous wallets and link them to known individuals. The IRS also collaborates with contractors like Chainalysis to assist in this process.

It’s important to note that even if you use anonymous wallets or pseudonyms, the IRS has the ability to trace these transactions back to you. 

NFT Transactions

When it comes to NFT transactions, you might be fascinated by the unique digital assets you can buy and sell on platforms like Ethereum. However, it’s important to remember that these transactions are not anonymous.

Just like with cryptocurrency transactions, NFT transactions are publicly visible on the blockchain, allowing the government, including the IRS, to track them. The same methods used to track cryptocurrency transactions can be applied to NFT transactions.

By analyzing the blockchain and matching anonymous transactions to known individuals, the IRS can identify NFT owners and their transactions. This means that if you participate in NFT transactions, you should be aware that the government has the capability to track them and may require you to report any taxable gains.

It’s crucial to stay compliant with tax regulations to avoid potential penalties and audits.

Risks of Hiding Cryptocurrency

Concealing cryptocurrency from the IRS can have dire consequences, as evading taxes is a serious offence with severe penalties. Hiding cryptocurrency assets puts you at risk of audits and exposes you to potential penalties and legal action.

The IRS has been actively cracking down on unreported cryptocurrency transactions and has the tools and resources to track hidden assets. Even if you think your transactions are anonymous, the IRS can employ advanced techniques and work with contractors like Chainalysis to trace anonymous wallets back to specific individuals.

Tax liability can arise from various crypto-related activities, such as earning staking or mining rewards, trading one cryptocurrency for another, or even using cryptocurrency to purchase goods and services.

To avoid the risks associated with hiding cryptocurrency, it’s recommended to report all taxable transactions accurately on your tax returns.

Conclusion: Not Truly Anonymous

In conclusion, the government, specifically the IRS, has the capability to track cryptocurrency transactions through various methods.

With major cryptocurrency exchanges reporting to the IRS through 1099 forms and the use of contractors like Chainalysis to match anonymous wallets to known investors, it is clear that the government is actively monitoring cryptocurrency activities.

Even though there are some exchanges that don’t require KYC information and don’t send 1099 forms, public blockchain transactions, including NFT transactions, can still be tracked by the IRS.

It’s crucial to understand that hiding cryptocurrency from the IRS isn’t advisable, as tax evasion is a serious offense with severe penalties.

If cryptocurrency wasn’t reported on previous tax returns, it’s recommended to file an amended tax return to avoid potential audits.

Article tags

bitcoin
cryptocurrency
privacy
Jinia

Author

Jinia is a fintech writer focused on the cryptocurrency market and passionate about blockchain technology. With years of experience, she contributes to some of the most renowned crypto publications such as Cointelegraph, Coinmarketcap and others. She also has experience writing about the iGaming industry.

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