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Bitcoin Government Businesses Software The Almighty Buck United States

IRS Now Has a Tool To Unmask Bitcoin Tax Evaders (thedailybeast.com) 210

SonicSpike shares a report from The Daily Beast: You can use bitcoin. But you can't hide from the taxman. At least, that's the hope of the Internal Revenue Service, which has purchased specialist software to track those using bitcoin, according to a contract obtained by The Daily Beast. The document highlights how law enforcement isn't only concerned with criminals accumulating bitcoin from selling drugs or hacking targets, but also those who use the currency to hide wealth or avoid paying taxes. The IRS has claimed that only 802 people declared bitcoin losses or profits in 2015; clearly fewer than the actual number of people trading the cryptocurrency -- especially as more investors dip into the world of cryptocurrencies, and the value of bitcoin punches past the $4,000 mark. Maybe lots of bitcoin traders didn't realize the government expects to collect tax on their digital earnings, or perhaps some thought they'd be able to get away with stockpiling bitcoin thanks to the perception that the cryptocurrency is largely anonymous.

"The purpose of this acquisition is to help us trace the movement of money through the bitcoin economy," a section of the contract reads. The Daily Beast obtained the document through the Freedom of Information Act. The contractor in this case is Chainalysis, a startup offering its "Reactor" tool to visualize, track, and analyze bitcoin transactions. Chainalysis' users include law enforcement agencies, banks, and regulatory entities. The software can follow bitcoin as it moves from one wallet to another, and eventually to an exchange where the bitcoin user will likely cash out into dollars or another currency. This is the point law enforcement could issue a subpoena to the exchange and figure out who is really behind the bitcoin.

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IRS Now Has a Tool To Unmask Bitcoin Tax Evaders

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  • Evading taxes? (Score:4, Insightful)

    by Anonymous Coward on Thursday August 24, 2017 @08:03AM (#55074675)

    How dare the little people!??? Only corporations who purchased the proper politician get to evade their personal responsibility.

    • Only corporations who purchased the proper politician get to evade their personal responsibility.

      But evading taxes is "smart". Just ask the president.

  • and now the IRS scammers will ask for bitcoins

  • by Anonymous Coward

    Certainly not all people trading in bitcoin are based in the USA and owe taxes to the IRS!

    • by EvilSS ( 557649 )

      Certainly not all people trading in bitcoin are based in the USA and owe taxes to the IRS!

      Well maybe the IRS will be nice and share their data with tax authorities from other countries. Everyone wins!

    • by Anonymous Coward

      Everyone on this planet owes the IRS taxes unless they can prove otherwise.

  • by Anonymous Coward on Thursday August 24, 2017 @08:16AM (#55074735)

    Bitcoin has a permanent log of all transactions going back to the very beginning. The log never goes away.

    As soon as a single trasnaction become tied to a real person then every transaction ever made by the person is exposed.

    Bitcoin is not anonymous. Never was never will be. Using for that purpose = fool. There are other cryptocurrencies designed for anonymous, bu tthey are not as popular so also not as useful.

    • by MrLogic17 ( 233498 ) on Thursday August 24, 2017 @08:23AM (#55074775) Journal

      ^ This.

      The distributed ledger is the opposite of anonymous- everyone has a full copy of all transactions. To use a bank analogy, you have a land of numbered Swiss bank accounts, and the transactions are published in a daily newspaper. Cracking who owns what is simply an exercise in meta data analysis.

      • The distributed ledger is the opposite of anonymous- everyone has a full copy of all transactions.

        No, the use of a single ledger (distributed or not), is orthogonal to anonymity. It is totally possible to design a single distributed ledger, blockchain-based cryptocurrency which has anonymity guarantees. Bitcoin is simply not such a design; anonymity wasn't a design goal.

        What Bitcoin is, is a ledger full of pseudonymous transactions. Pseudonymity is not anonymity, though with sufficient care it is possible to ensure that a pseudonym is not tied to any real-world identity, achieving anonymity, but that'

    • Bitcoin has a permanent log of all transactions going back to the very beginning. The log never goes away.

      As soon as a single trasnaction become tied to a real person then every transaction ever made by the person is exposed.

      Bitcoin is not anonymous. Never was never will be. Using for that purpose = fool. There are other cryptocurrencies designed for anonymous, bu tthey are not as popular so also not as useful.

      Came here to say precisely this.

      BC could be a possible hedge against runaway inflation among normal fiat currencies, but it was never intended nor designed for anonymity.

      Strat

    • Yes and no, they then know who had that particular wallet true, they don't know who owned the last wallet up the chain or after which may or may not have been the same person. Of course the IRS has a habit of putting the burden of proving everything on the individual years after the fact when that individual had no reasonable expectation they'd have to account for something... even when they have explicitly not had to account for something decades prior.

      A dirty little secret of forensic accounting is that i
    • and good enough is often if not always good enough. Bitcoin just needs to be one stop on the road to money laundering. The goal isn't to be perfect, it's to make a trail hard enough to follow that it's not worth the effort. Kinda like a password. In theory you could guess any password given enough time but in practice you can't.
    • by Anonymous Coward

      Bitcoin has a permanent log of all transactions going back to the very beginning. The log never goes away.

      As soon as a single trasnaction become tied to a real person then every transaction ever made by the person is exposed.

      Bitcoin is not anonymous.

      That's a complete misunderstanding of how bitcoin works on so many levels it's hard to know where to start.

      I'll start by assuming you didn't actually mean "ever(y) transaction ever made by the person", even though that's a direct quote. If I have two different bitcoin addresses. Attaching my name to address A tells you exactly nothing about address B, unless they are linked by some OTHER means.

      Okay, so assuming what you meant was that attaching a name to a given address, A, then this ties every single trans

      • What you CAN tell from putting a name to a single address is to go back and see where the bitcoins came from. But bitcoins are like water. You can follow the flow, but you cannot distinguish my cup from the other water it comes into contact with. Trying to follow MY cup of water as it mixes with others (e.g. taint analysis) isn't exactly trivial and will usually require more information that even the authorities don't have access to. And if I pour my cup of water into a known mixing lake, you might assume I control one or more of the "cups" of water taken out of the lake, but you have no idea which one(s).

        Holy SHIT is that a good explanation for something I knew about but couldn't wrap my head around. I had the exact same sort of conception about the blockchain that the coward did and wondered just how it was ever used in criminal enterprise. I knew "they went into an anonymizer" but didn't understand how that lost track of who was who.

        Still, there's list out there of everyone who has ever accepted stolen bitcoins. If I could go to the FBI or whatever cyberpolice and report that $2 mill of bitcoins were

    • by hey! ( 33014 )

      Not to mention that if you want to participate in a contraband market, you need to establish reputation; and if the contraband is anything other than information (like lists of stolen credit cards), you have to transfer physical goods too. This means once the authorities have unmasked one party in a web of transactions, they can start unraveling the thread.

      While it would be foolish to rely on cryptocurrency as being anonymous, it's not necessarily foolish to try to exploit its pseudonymous nature, if you u

  • 802 people reported Bitcoin profits and losses. That is probably a significant percentage of people that had enough usage of Bitcoin to even report. I know a lot of people use bitcoin, but I seriously doubt most people usage of Bitcoin warrant reporting on taxes.

    • To be brutally honest, the types of transactions that most people make with Bitcoin (drug buys, money laundering, etc) aren't exactly the ones you want to report to the government. If they were dumb enough to report those to the IRS, they'll have problems worse than tax evasion to worry about.

      • But it may be easier to prove they did not pay their taxes than to prove they sold drugs. IE, IRS: Where did that 500K in your bitcoin account come from? Drug seller: I don't know. IRS: You failed to declare that on your 1040, tax evasion, go directly to jail. Many criminals have been brought down by the IRS.

        • by mark-t ( 151149 )
          I didn't know that going directly to jail for tax evasion was actually a thing anymore. I thought that what they did now was they would assume it was an error, and notify the person, providing them with an opportunity to correct it by paying the amount owed (with interest, of course). I would imagine that one would only actually go to jail if they could be found to be deliberately avoiding paying the amount that they supposed to owe. This should require going to court first and so one wouldn't really go
          • /sarcasm... Of course and yes they do give lots of notice. But in many cases the justice system cannot prove the criminal activity, just the spoils. So what has convicted many very hard to convict criminals is taxes. My personal experience with the IRS has been quite good, even when I've made some rather stupid mistakes. But they were not intended mistakes, just typos. If anything I've had friends do things that should have gotten them into much more trouble than it did. I fondly remember one friend telling

        • by PPH ( 736903 )

          IRS: Where did that 500K in your bitcoin account come from?
          Me: Selling WoW goods.
          IRS: Do you have any records to back that up?
          Me: Yes. But they are cloaked by an invisibility spell.

      • To be brutally honest, the types of transactions that most people make with Bitcoin (drug buys, money laundering, etc) aren't exactly the ones you want to report to the government. If they were dumb enough to report those to the IRS, they'll have problems worse than tax evasion to worry about.

        I wouldn't bet on that. Tax evasion is how they put Al Capone in prison. If you look on line 21 of the standard 1040 form you will see it says "Other income. List type and amount". It may as well say "report earnings from illegal drugs and other crimes here". This is where they get drug dealers because ANY income has to be reported by law, whether or not it was legally obtained. So if you don't report the earnings from drug deals (or any other crime) they bust you for tax evasion even if you manage to

    • That argument falls on deaf ears with the IRS. If I buy you a cup of coffee you are supposed to report it. That said, the IRS didn't have established procedures for declaring Bitcoin gains and losses in 2015 or even a set standard. Was it capital gains? Was it additional income? Exactly how did one report it? There likely were quite a few people who picked other methods and would be able to show it if audited.
  • It's been said before: BitCoin is not anonymous. That's not even part of the design: by definition, the blockchain makes all transactions fully traceable. The only anonymity is one of obscurity, and the IRS software does not address this: how do you map a BitCoin address to a particular person.

    If you have that information, however, then BitCoin is fully open, and transactions are fully traceable. Even the "mixers" are just a stupid game that serve little purpose other that to impose a fee on people with gui

    • by PPH ( 736903 )

      I'm wondering how long it will take for governments to start trying to make anonymous currencies illegal.

      Benjamin Franklins are next.

    • Man, this was finally explained by a coward up there.

      Bit coins flow like water, there's no serial number on individual coins. It's values in and out. They mix together. And there's an endless number of addresses, and those addresses aren't tied to real people (UNTIL THEY ARE).

      So if you want to receive bitcoins anonymously, you make a new address, receive the bitcoins, put it into a mixer, and take it out with a different address.

      Now the only entity that knows who you are is the mixer whom you paid as a ce

  • No one likes paying taxes, so any time the IRS figures out how to track income or close a loophole, there's bound to be lots of grumbling. The only tax that the IRS is pretty much guaranteed to get is the tax on W-2 income and investment capital gains due to automatic reporting. Everything else can be gamed. Large companies purchase tax loopholes by buying politicians and accounting services, and there's not much that can be done about that. Small companies are basically free to report what they want to rep

    • by mysidia ( 191772 )

      The only tax that the IRS is pretty much guaranteed to get is the tax on W-2 income and investment capital gains

      Yes... and the W-2 Reporting and forced witholding is Unfair enforcement, because it disproportionately hurts Employees, while giving corporations, individual contractors, and "Gig" / "Odd" employees who take cash for every job an unfair advantage.

      So if you give up being an employee, and go out on the street and do odd jobs on the street, you can hit the taxpayers twice ---- first be

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