The rise of cryptocurrencies and Bitcoin ATM machines has led more businesses and individuals to invest and trade these digital assets. However, many fail to report their crypto transactions when filing their taxes as they don’t understand the reporting requirements for this type of investment.
Others may assume crypto transactions go undetected due to their decentralized nature and anonymity. This article will examine if the IRS can track crypto transactions.
Can the IRS Track Crypto Transactions?
The short answer is, yes, the IRS can track crypto transactions. In recent years, the agency has sent tens of thousands of letters to taxpayers who may have failed to report their crypto transactions.
Is Bitcoin Traceable By the IRS?
Yes, Bitcoin transactions are traceable by the IRS. The Bitcoin blockchain operates through a public, distributed ledger that maintains permanent records of all transactions. This makes them accessible to anyone, not only the IRS, provided they have the transaction ID, commonly known as a hash. The hash and other transaction details, such as Bitcoin wallet addresses, are also accessible for the IRS as centralized crypto exchanges share this information with the agency.
Can the IRS Track Anonymous Wallets?
Some cryptocurrencies, such as Monero and Zcash, may claim to offer anonymity, but the IRS has sophisticated techniques to track transactions involving these digital coins. Also, crypto exchanges where these coins are bought or sold are required by law to verify their customers’ identities. This makes it challenging for users to remain anonymous.
How Does the IRS Track Crypto Transactions?
The IRS has a sophisticated system and strategies for tracking crypto transactions. These include the following:
Blockchain Analysis Tools
The IRS has partnered with blockchain analytics firms to develop tools to track cryptocurrency transactions. These tools use advanced algorithms to trace the flow of cryptocurrencies on blockchains.
Data Sharing Agreements
All major crypto exchanges in the U.S. must complete the Know-Your-Customer (KYC) procedures and share the information with relevant oversight bodies, including the IRS. This includes:
- Personal data such as name, address, or even social security number
- Biometric identification, such as facial images or videos
- Photo ID
If the IRS suspects widespread tax evasion within a particular group using cryptocurrency, it may issue a John Doe summons which allows the agency to obtain information on all users meeting certain criteria. This can include users who have transacted above a certain threshold, in dollar amounts or number of transactions. Examples include the 2016 summons on Coinbase users and the 2023 summons on 42,000 Kraken users.
Subpoenas
The IRS also has the mandate to issue subpoenas to cryptocurrency exchanges, wallets, and other cryptocurrency service providers. Subpoenas allow the agency to request information about customers’ transactions. This includes transaction history, account balances, and customer identity verification information.
Compliance and Reporting Obligations
In 2014, the IRS issued a notice stating that virtual currencies would be classified as property for federal tax purposes. Any gains or losses from these assets are subject to capital gains tax. Also, any income from cryptocurrency is taxable and must be reported to the IRS. Failure to comply can result in fines. The IRS collaborates with crypto exchanges to ensure compliance.
Which Crypto Exchanges Report to the IRS?
Many crypto exchanges send 1099 forms to users and the IRS, documenting their users’ trading activities. The popular exchanges that send 1099 forms to the IRS include:
- Coinbase
- Binance US
- Gemini
- Kraken
- Bitstamp
- Crypto.com
- PayPal Crypto
Which Crypto Exchanges Do Not Report to the IRS?
Some crypto exchanges do not issue 1099 forms. These are decentralized cryptocurrency exchanges (DEX) and include:
- Bisq
- TradeOgre
- Pionex
- Hodl hold
- ProBit
- Uniswap
- PancakeSwap
However, there are some proposed amendments to cryptocurrency tax laws this year. Under the new regulations, all crypto exchanges operating in the U.S., including decentralized exchanges, will be required to report transactions to the IRS using the new Form 1099-DA.
The Importance of Crypto Buying and Selling
Most of the self-proclaimed anonymous exchanges aren’t compliant with U.S. laws and are, therefore, not permitted to operate in the country. Investors who trade on these platforms may have their accounts frozen or access restricted with little to no warning, leading to the loss of assets.
A good example is Gate.io, which withdrew its services from the U.S. in March 2022 due to regulatory challenges. Bitcoin ATM machines are a safe alternative for buying and selling cryptocurrency.
Buy and Sell Crypto Safely With CoinMover’s Bitcoin ATM Machines
CoinMover offers a safe and compliant way to convert cash into cryptocurrency with its network of Bitcoin ATM machines. These crypto ATMs are in convenient locations and have the largest buying limit without an ID. Find a CoinMover Bitcoin ATM machine near you to start trading securely today.