Anonymity is one of the reasons many crypto enthusiasts say they favor digital assets but it turns out crypto is not private or anonymous — just ask the Internal Revenue Service. 

The tax agency is tracking your crypto holdings and activities. 

Most federal law enforcement agencies employ experts adept at tracing cryptocurrency, and they’re using sophisticated software to harness big data and link transactions to people.

“If a bank was robbed five years ago and you’re still trying to chase down those leads, you have no idea potentially where that stolen cash could be at this point,” Chris Janczewski, formerly the lead crypto investigator with the IRS, told NBC News. “With cryptocurrencies, like Bitcoin, every transaction is on a public ledger. It’s public and is there forever.”

The most commonly traded cryptocurrency, including Bitcoin, is digital money that the government does not back. It exists on a the blockchain, a decentralized network protected by unbreakable codes.

At first, bitcoin and other crypto were viewed as a way for criminals to hide their illegal transactions since, while the transactions are recorded, the users’ identities can be obscured. However, law enforcement has been able to uncover users’ identities.

During tax time, the IRS began to crack down on the reporting – or non-reporting– of crypto assets and transitions. 

Between 2016 and 2020, the IRS began using additional tools designed to examine cryptocurrency. For example, the IRS contracted with cryptocurrency investigation firm ChainAnalysis to harvest data from the blockchain concerning unreported cryptocurrency transactions, Evan Davis, a principal at tax law firm Hochman Salkin Toscher Perez P.C., wrote in his company’s blog.

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The IRS is focusing on training its revenue agents on how to incorporate cryptocurrency into its audits. Revenue officers are being trained on how to identify and levy cryptocurrency, and special agents are learning how to conduct criminal investigations of unreported cryptocurrency, Davis wrote.  

The IRS debuted a new tax form requesting crypto information this tax season. Crypto investors filing their taxes have to know how to track cost basis, maintain good records of all original purchases and transactions, and report everything in U.S. dollar terms, Coindesk reported. If they don’t, they face the possibility of an audit.

Despite the threat of an audit, crypto investors are likely paying less than half the taxes they owe, according to a new analysis from Barclays Plc.

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