IRS Tracking Bitcoin Users

The IRS is using a software company to help them track people who use Bitcoin. Less than 1,000 people declared bitcoin income on their 2015 tax returns.  It is thought that maybe millions of people trade in digital currency.  The IRS expects to collect tax on all earnings, including Bitcoin.  The software company that the IRS is working with is called Chainalysis and its software can track and analyze the movement of money through the bitcoin economy.   The IRS is licensing the software from Chainalysis.  Chainalysis claims that it has information on 50% of all Bitcoin activity and 25% of all users.  This is apparently possible because some exchanges store information in online wallets.

Last year the IRS filed a legal order demanding the identities of all American users of the Coinbase exchange for a three year period.  It is understood that the IRS has agreed to restrict its request to customers with transactions exceeding $20,000.  Of note, apparently other cyber currencies have privacy features built-in that pose problems when trying to track transactions.  It may be that the money that the IRS would need to investigate all these currencies would not be practical.  On the other hand, the information obtained could be used to find drug dealers and criminals laundering money--not just tax cheats.  In any event, it is clear the IRS is making an attempt to track Bitcoin users.

Gene Bowman, Bowman Law Firm, Tax Attorney