[ad_1]
When you hear that the Internal Revenue Service (IRS) is incentivizing developers to provide cryptocurrency tracking methods, it could be assumed that it is trying to hunt down every last penny of tax money to make sure the government is getting what is due.
While there is probably some truth to this theory, it is also true that the IRS Criminal Investigation Department (IRS-CI) routinely dismantles all kinds of clandestine criminal businesses from dark web markets that sell illicit goods to organized fraud. and money laundering rings.
Enterprising entrepreneurs can now submit proposals to the IRS; those that can demonstrate the success of cryptocurrency tracking technology may be eligible for grants of up to $ 625,000.
The IRS and the monitoring of cryptocurrencies
The IRS is trying to lift the veil of secrecy surrounding cryptocurrency transactions. While Bitcoin transactions and wallet addresses are made public, nothing else about the transaction links to personal identities. As long as a cryptocurrency user doesn’t pass information that could link them to these transactions or uses a personal email address to sign up for a coin exchange, it’s virtually impossible to identify them. Some types of “high security” coins (like Monero) go a step further by hiding wallet IDs and transaction amounts as well.
While there is no end to the legitimate uses of cryptocurrency, these types of payments are obviously attractive to criminals. Cryptography is typically required in ransomware and blackmail situations, is the currency of the kingdom on dark web markets that sell illicit drugs, and is a popular target for hackers looking to steal a hard-to-trace form of currency. There’s a legitimate reason for law enforcement’s cryptocurrency tracking capabilities, but it’s very hard to make ends meet.
The IRS isn’t alone in looking for cryptocurrency tracking technologies to assist in all of the above scenarios. In August, security company CypherTrace announced that it had developed a means to expose the wallet IDs of Monero users at the behest of the US Department of Homeland Security. However, there is still no means of deciphering the identity of cryptocurrency wallet holders other than good old-fashioned detective work and hoping that the holder makes some sort of public error.
IRS-CI has asked contractors to provide it with cryptocurrency tracking capabilities that go beyond what’s currently available. The agency has launched a request for “tools, software, data and algorithms” that allow it to track and attribute coins and off-chain Level 2 transactions. The Layer 2 network protocol adds an extra layer of security to coins like Monero adding a final anonymous transaction step secured by a third party.
However, the amounts offered do suggest how many serious buyers the IRS will actually have. The agency is offering an initial grant of $ 500,000 for a working prototype, followed by another grant of $ 125,000 for further development. If you were able to come up with some sort of analysis or other measure that could reliably track and identify cryptocurrency holders, you would think it would be worth much more to other sources. To be fair to the IRS, it appears to focus more on the ability to lift elements of anonymity especially from “privacy coins” like Monero and BTC Lightning Network than on the ability to instantly identify a wallet holder. However, CipherTrace’s contracts for its similar work on the Monero monitoring tool have apparently totaled over $ 6 million to date.
Hackers switch to coins for privacy
There has been a sharp increase in hackers moving to Monero in recent months, with a particularly strong peak in August. Although the controversial currency has been removed from a number of major exchanges (and even banned entirely in Japan), its additional layer of anonymization is highly appealing to ransomware attackers and similar threat actors providing a wallet address to victims. during the process of executing a crime.
However, cryptocurrencies (and the interest in strong transaction privacy) aren’t just for criminals anymore. The coronavirus crisis appears to have triggered a kind of boom of interest in cryptocurrencies among the general public, likely fueled by concerns about the security and anonymity of digital transactions with multiple purchases moving online during lockdown measures and restrictions. of travel.
Is the IRS Tracking Taxpayers Who Use Cryptocurrency?
The IRS almost certainly wants to be able to account for crypto transactions and is planning to do so, but it is unclear how much of this push to monitor cryptocurrency relates to tax evasion versus the stated goal of more law enforcement. effective.
This is the first year the IRS has revised its forms to specifically ask tax registrants if they have bought or sold cryptocurrencies. While the “I didn’t know cryptography needed to be reported” excuse probably wouldn’t have worked before this during an audit, the frank question now makes it abundantly clear to filers that the IRS wants accounting of all virtual currencies for tax purposes.
There is a legitimate reason for #lawenforcement #cryptocurrency’s monitoring capabilities, but it’s very difficult to make ends meet with #privacy. #respectdata
However, this can create an inherent privacy conflict even for those who want to be honest about their tax obligations. Documenting cryptocurrency transactions could mean disclosing a wallet address to the IRS, which defeats the purpose of the anonymity system. There is preliminary evidence that the IRS used known addresses to track transactions to other unknown addresses for audit purposes. The IRS guidance on the subject seems to suggest that crypto transactions must be declared by providing a record of each transaction or by providing all transactions throughout the year for a particular wallet address. Reason documented the story of a first filer holding cryptocurrencies in this very situation, who wanted to completely settle his tax obligations with the IRS but insisted on blocking public addresses from all documentation. This has led to a multi-year judicial battle in which the crypto holder is fighting summons issued by the IRS which essentially require continuous oversight of all its transactions.
