You’re not alone if you’re curious about the government’s ability to track your cryptocurrency transactions. Cryptocurrency has become a popular investment option, but its anonymous and decentralized nature has raised concerns about its use for illicit activities. You may have heard of the government’s interest in regulating cryptocurrency, but what about their ability to track it?
In this article, we’ll dive deep into whether the government can track crypto, how they do it, and what this means for your digital assets.
Does the Government Know Who Owns Crypto?
If you’re wondering whether the government knows who owns crypto, the answer is that it depends. Crypto transactions are public and visible on the blockchain, meaning the government can see all transactions. However, the government can only link crypto transactions to an individual’s identity if they reveal their identity at some point. This could happen, for example, when someone uses a centralized exchange or interacts with known wallets.
By analyzing the crypto addresses used for transactions, the government can get insights into what is happening and when. The government can trace crypto ownership if a series of crypto transactions can be linked to an individual’s identity. This can be used to enforce tax liabilities on cryptocurrencies or to combat criminal activities like money laundering.
So, while Bitcoin transactions are not always 100% anonymous, the government’s ability to trace crypto ownership depends on whether an individual’s identity can be linked to their transaction activity on the blockchain.
Is Crypto Traceable by the Goverment?
Yes, the government can trace crypto transactions because:
- Blockchain technology records all transactions on a public ledger that anyone can see, including government agencies.
- Some centralized crypto exchanges share customer information, such as wallet addresses and personal data, with agencies like the IRS.
- The IRS even has agents who are trained to link wallet addresses to individual users, making it possible for them to trace crypto transactions.
How Does the Government Track Crypto?
The US government has been increasing its efforts to track cryptocurrency transactions, especially as a means to tackle tax evasion. For example, the Internal Revenue Service (IRS) has been given a significant budget increase to hire over 87,000 agents to enforce tax compliance, focusing on crypto transactions.
SIDENOTE. All countries have certain institutions in charge of tracking crypto transactions. To explain below, we have used the IRS, the US institution in charge of this. As the IRS acts, so do similar institutions in other countries. The IRS, or Internal Revenue Service, is a government agency that collects federal taxes and enforces the Internal Revenue Code, the primary federal tax law.
To operate in the US and most countries worldwide, major crypto exchanges must complete Know-Your-Customer (KYC) checks on new and existing customers, including collecting personal data, banking information, phone numbers, and employment details. This information, along with the visibility of crypto addresses you withdraw funds to, can help exchanges identify your custodial wallets and, thus, your crypto ownership.
However, it is important to note that not all crypto exchanges abide by KYC regulations. For instance, decentralized exchanges (DEXs) often present challenges in complying with regulatory measures due to their lack of a centralized governing body and being run by a distributed network of users instead of a single company or group of individuals.
As for how the government tracks crypto, blockchain technology is anonymous but also transparent, allowing anyone, including government agencies, to observe transactions. While enforcers may not directly identify the parties involved, they can observe the blockchain and analyze crypto movements and corresponding patterns. Companies like Chainalysis provide blockchain monitoring and analytics services, which help identify if certain crypto movements between wallets are associated with criminal activity. These companies may collaborate with the FBI to help investigators track certain cryptocurrency funds internationally.
The government’s interest in tracking Bitcoin and other cryptocurrencies is mainly to catch people or organizations that use them for illicit purposes like money laundering, fraud, or tax evasion.
Do Crypto Exchanges Report to the IRS?
Yes, crypto exchanges report to the IRS. In fact, many large exchanges have already confirmed their compliance with IRS regulations. In 2016, the IRS won a John Doe summons against Coinbase, which required the exchange to share user data with the IRS for tax auditing and prosecution purposes. Since then, the IRS has issued similar summons against Kraken and Poloniex, and in 2023, it filed another court document seeking permission to enforce a summons for information against Kraken.
To operate in the US and other countries lawfully, crypto exchanges must follow various regulations, and the success of these IRS summons has compelled many exchanges to comply with the IRS to avoid a similar situation. Furthermore, the IRS launched Operation Hidden Treasure in March 2021, which is a specialized team trained in cryptocurrency and virtual currency tracking. This team aims to root out tax evasion from crypto investors in partnership with the civil office of fraud enforcement and the IRS.
The Bottom Line
The government can indeed track cryptocurrency transactions, and their ability to do so depends on various factors such as an individual’s identity, exchange compliance with regulations, and blockchain transparency. While some crypto transactions may remain anonymous, the government’s efforts to track crypto have increased, with specialized teams and companies providing blockchain monitoring and analytics services. The government’s main goal in tracking crypto is to tackle criminal activities such as money laundering, fraud, and tax evasion. As crypto continues to gain popularity as an investment option, investors need to understand the regulations and compliance requirements surrounding crypto exchanges and transactions.
