IRS signs contract to track bitcoin transactions

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The Internal Revenue Service has signed a contract with a company called Chainalysis that offers software for analyzing and tracking bitcoin transactions.

The IRS has been pushing for ways to tax bitcoin transactions. In 2014, it issued basic guidance in Notice 2014-21 stating that virtual currencies such as bitcoin should be treated as property rather than currency for tax purposes. However, the IRS found that only a little over 800 taxpayers declared either losses or profits in bitcoin in 2015. The agency suspects that bitcoin and similar digital currencies are being used for tax evasion. It filed a broad request known as a John Doe summons last November seeking the identities of users from Coinbase, one of the largest bitcoin exchanges in the U.S. But after coming under pressure from members of Congress, the IRS scaled back the request in July to Coinbase users who engage in transactions of $20,000 or more (see IRS scales back Coinbase investigation).

Nevertheless, the IRS recently signed a contract with Chainalysis to track and analyze bitcoin transactions through the company’s Reactor tool, according to a report last week in the Daily Beast. Although the original invoice was only for $13,188, a later agreement increased the deal to $124,000, according to ETHNews. The IRS has paid more than $88,700 since 2015 to the company, according to the Daily Beast.

The software is supposed to help the IRS track the use of bitcoin for trade in not only illicit goods such as drugs and ransomware payments, but also to uncover its use for concealing wealth from the tax authorities. “The purpose of this acquisition is … to help us trace the movement of money through the bitcoin economy,” said a section of the contract, which the Daily Beast received through a Freedom of Information Act request.

Separately, The Wall Street Journal reported last week that the IRS may be close to issuing additional guidance on bitcoin taxes, especially in light of the recent split in the bitcoin world between bitcoin and a competing version known as Bitcoin Cash, in which every bitcoin owner was set to receive an equivalent amount of Bitcoin Cash.

The Financial Accounting Standards Board has also been coming under pressure to develop guidance for how to account for bitcoin and other so-called "cryptocurrency" transactions. According to Thomson Reuters, FASB is in the early stages of developing an accounting standard for digital currency.

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