Does the government know who owns Bitcoin? How is Bitcoin taxed?

Please accompany Unilaunch to learn “Does the government know who owns Bitcoin? How does the government track Bitcoin? How is Bitcoin taxed?” through the article below.

Does the government know who owns Bitcoin?

At the basis of cryptocurrencies like Bitcoin (BTC) stands blockchain technology. A fundamental characteristic of blockchain technology is transparency, meaning that anyone, including the government, can observe all cryptocurrency transactions conducted via that blockchain.

Bitcoin transactions are publicly accessible because of the transparent nature of blockchain technology. Besides, the history of Bitcoin transactions is permanently stored on the Bitcoin blockchain, implying that it is not hard to observe BTC transactions. The government, in the form of law enforcement authorities, may thus watch what happens on the Bitcoin blockchain.

Related: What makes Ether qualify as money?

Does the government know who owns Bitcoin?

So, can authorities like the police, the Federal Bureau of Investigation (FBI) and the Internal Revenue Service (IRS) trace Bitcoin ownership? And, do authorities know who owns which Bitcoin? The traceability of BTC transactions depends on whether someone’s transaction activity on the Bitcoin blockchain can be linked to their identity.

Anyone can observe all cryptocurrency transactions of any Bitcoin wallet address. To find out where the Bitcoin is coming from and where they are being sent, authorities can analyze the BTC addresses that are used for transacting. In this manner, authorities get insights into what is happening and when.

Many Bitcoin users reveal their identity at some point (for instance, on centralized exchanges or through interactions with known wallets). Thus, BTC transactions do not always remain 100% anonymous and the government can trace Bitcoin ownership whenever (a series of) Bitcoin transactions can be linked to one’s identity. With that new knowledge, governments can enforce duties such as Bitcoin or cryptocurrency tax liabilities or fight criminal conduct like money laundering.

How does the government track Bitcoin?

Bitcoin’s blockchain technology is, in principle, anonymous but also traceable due to the transparency element. Bitcoin can thus be called “pseudo-anonymous.” Government agencies are hiring cryptocurrency experts to help them with BTCtracking and identity verification.

In practice, how can authorities like the police, the IRS or the FBI track Bitcoin? Since enforcers may not directly identify the parties involved in a Bitcoin transaction, they can try to observe the blockchain and analyze BTC movements and corresponding patterns. In this manner, they seek to profile, de-anonymize and identify those that are transacting.

So, why would governments do that and with whom do they collaborate? Importantly, most Bitcoin transactions are not associated with criminal activity. Yet, enforcers like the police or the FBI still aim to catch people or organizations that use cryptocurrencies such as Bitcoin for illicit purposes, such as money laundering or fraud. Likewise, an agency like the IRS wants to track BTC owners, traders and investors in order to raise taxes from capital gains or income.

Companies like Chainalysis provide services for blockchain monitoring and analytics. These companies analyze if certain BTC moving between wallets are, in some way, associated with criminal activity and they may collaborate with the FBI in helping investigators track certain cryptocurrency funds internationally.

Do the authorities know when and where Bitcoin is bought?

Apart from data analysis done alone or in cooperation with private companies, authorities may request information from centralized exchanges. Due to regulation, centralized exchanges may also be obligated to share such information. However, not all cryptocurrency exchanges collaborate with authorities.

A centralized exchange is a cryptocurrency exchange that is run by a single entity, such as Coinbase. To become a licensed operator in a certain country or territory, centralized exchanges need to comply with regulations.

For instance, to decrease cryptocurrency anonymity and the illicit use of cryptocurrencies, most centralized exchanges have incorporated Know Your Customer (KYC) checks. KYC is meant to verify customers’ identities alongside helping authorities to analyze activity on the blockchain. In practice, individuals need to submit a range of documents and their data before they are allowed to trade, invest and transact.

After KYC has been conducted, exchanges may be requested or may be obligated to share that data with law enforcement agencies. Since the exchange has individuals’ personal data and transaction data, so may the government. By using information obtained from centralized exchanges, the IRS can identify unknown Bitcoin wallets using KYC checks and corresponding personal information.

Nonetheless, not all exchanges use KYC. For example, it is difficult to make decentralized exchanges (DEXs) comply with regulations because they lack a headquarter and are not run by a centralized company or a small group of individuals.

How is Bitcoin taxed?

How to report Bitcoin on taxes and rules for Bitcoin taxation depend on the specific situation and someone’s country of fiscal residence. For instance, United States taxpayers must report cryptocurrency sales and other taxable events, and each of these transactions has different legal implications.

The fiat currency gained from cryptocurrency activities, also considered as realized gains, is taxed at different rates and can be considered capital or as income. Keep an eye out for the latest updates in terms of tax requirements and obligations.

Events may be taxable as capital gains when one sells Bitcoin for cash, when one converts BTC to another cryptocurrency or when one spends Bitcoin to purchase goods or services. According to the latest requirements, cryptocurrency capital gains in the US should be recorded by submitting Form 8949.

Bitcoin may also be taxed if it is considered income when someone receives a salary in BTC or receives Bitcoin for providing goods or services. Keep an eye on specific blockchain-related events because other incentives or rewards may also be taxable (for instance, staking rewards or obtaining new assets due to a hard fork or airdrop).

On the contrary, certain situations are not taxable, for instance, when one is simply holding Bitcoin passively or when BTC donations or gifts are transferred. Depending on the situation, there may still exist legal obligations or requirements to report such events to the IRS or an alternative qualified agency.

What happens with unreported cryptocurrency?

Not reporting Bitcoin despite the obligation to do so may have severe consequences for individuals’ lives and finances. The fine for making an incorrect declaration can be substantial and can even be considered a felony in certain circumstances.

Individuals may wonder whether centralized cryptocurrency exchanges actively report to the IRS. Centralized exchanges do issue tax forms to the IRS. Likewise, the IRS has issued so-called John Doe Summons to exchanges, including Coinbase, to request people’s information and catch those who try to cheat on their tax obligations.

But, such summonses are not the only law enforcement tool that the IRS uses on its quest to enforce Bitcoin taxes. Form 1040, for instance, specifically asks U.S. taxpayers whether they transacted with cryptocurrencies such as Bitcoin.

Some people may choose to avoid reporting their Bitcoin transactions, income and capital gains. When U.S. taxpayers do not report taxable cryptocurrency activity and face an IRS audit or investigative procedure, however, it may be considered tax evasion or fraud. Individuals may ultimately be obliged to pay penalties or even face criminal charges. Indeed, tax evasion is considered a felony. The penalty may extend to half a decade of prison and a fine of up to tens of thousands of dollars.

Source: Cointelegraph.com

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