Is Cryptocurrency Regulation Coming?

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    The IRS is looking for tax evaders using Bitcoin, using Chainalysis to find them. Bitcoin is pseudonymous, All transactions are visible on the Blockchain, which is public and transparent. While good privacy practices can prevent leakage of information, there is always a point where Bitcoin transactions touch the traditional monetary system (when you use it in a store or when you sell it at an exchange) and proof of identity can become necessary.

    Working backwards, it is possible to unravel the chain of Bitcoin transactions to some extent. The IRS has been trying hard to obtain details about Bitcoin transactions and detect cases of tax evasion. The IRS had previously requested Coinbase to give it details about its users for the years of 2013-15.

    According to Daily Beast, the IRS has also awarded a contract to Chainalysis to analyze transactions and unmask users. Chainalysis uses data from public forums, leaked data sources including dark web, exchange deposits and withdrawals to tag and identify transactions. The IRS expects to use this data to catch tax evaders and people who illegal services for Bitcoin.

    There have been Bitcoin mixing services which specialized in obfuscating the source of Bitcoins. Bitmixer.io was the leader amongst mixing services, before it announced its decision to mysteriously shut down. Coinjoin transactions also make it difficult to trivially link Bitcoin transactions. Services like Joinmixer help like-minded individuals combine transactions to enhance privacy. Certain currencies like Dash, Monero and ZCash have inbuilt privacy features, which makes it difficult to track transactions.

    With so many secondary currencies the IRS will have a hard time getting compliance and avoiding tax evasion. Moreover, the resources that it would take to investigate these currencies would make the whole exercise infeasible. It is possible that a simple and clear tax regime with respect to cryptocurrencies may be what is required to gain higher compliance with respect to tax in cryptocurrencies. Cryptocurrencies are currently in their infancy and this may prevent people from fully disclosing their cryptocurrency holdings to tax authorities.

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