Recently, agencies of the federal government have been making efforts to increase their technological sophistication so that they can identify potential tax cheats utilizing cryptocurrency. This includes making deals with entities in the private sector.
This is no more evident than in the case of the government’s purchasing of a license to use crypto giant Coinbase’s tracing software. Through the licensing deal, federal investigators can now not only track transactions using cryptocurrencies, but also the people who are part of the transactions.
These additional measures make crypto tax compliance all the more necessary. To get immediate help from the Tax Law Offices of David W. Klasing, schedule a reduced-rate initial consultation today by calling (800) 681-1295 or scheduling online here.
Beginning last year, Coinbase, the largest cryptocurrency exchange platform in the country, began working with the federal government. In August of 2021, Coinbase sold a single analytics software license to the Immigrations and Customs Enforcement Agency (ICE), a division of the United States Department of Homeland Security. Since that time, ICE has developed the ability to access forensic features provided through Coinbase Tracer.
Coinbase Tracer, formerly known as Coinbase Analytics, is the platform’s intelligence-gathering tool that provides the ability to not only track individual transactions, but the parties involved in those transactions. Coinbase markets Tracer for use in both corporate compliance and law enforcement investigations, touting its ability to “investigate illicit activities including money laundering and terrorist financing” and “connect [cryptocurrency] addresses to real world entities.”
Coinbase Tracer has been a source of controversy since it was first introduced. In 2019, it was reported that Neutrino, a blockchain-analysis firm the company acquired in order to create Coinbase Tracer, “was founded by three former employees of Hacking Team, a controversial Italian surveillance vendor that was caught several times selling spyware to governments with dubious human rights records, such as Ethiopia, Saudi Arabia, and Sudan.” Following public outcry, Coinbase announced that the three staffers that were a part of Hacking Team would “transition out” of the company. However, the software that they helped to create still served as the backbone of Coinbase Tracer.
The contract between Coinbase and the federal government was first released through a Freedom of Information Act (FOIA). According to the contract, ICE now has the ability to track transactions across a number of the most popular digital currencies, including Bitcoin, Ether, and Tether.
Analytic features include “multi-hop link analysis for incoming and outgoing funds,” granting ICE insight into transfers of these currencies, as well as “transaction de-mixing and shielded transaction analysis” that is aimed at thwarting methods some crypto users utilize to launder their funds or camouflage their transactions.
The contract also provides “historical geo tracking data,” though it is unclear what exactly this data consists of or from where it is sourced. An email released through the FOIA request shows that Coinbase didn’t require ICE to agree to an End User License Agreement, standard legalese that imposes limits on what a customer can do with software.
Homeland Security Investigations, the division of ICE that purchased the Coinbase tool, is tasked not only with immigration-related matters, aiding migrant raids and deportation operations, but broader transnational crimes as well, including various forms of financial offenses.
However, with so many newly added capabilities, there is a possibility that the agency expands its mandate beyond what has previously been observed. “The contract provides a tool that supplements an HSI capability to investigative traffickers of deadly opioids on the dark web and cyber criminals who seek to attack critical infrastructure,” according to a statement made by an ICE spokesperson. However, in the same statement, the spokesperson also noted that “the agency does not provide specifics on investigative techniques, tools, and/or ongoing investigations or operations.”
Coinbase has in recent years made a concerted effort to pitch its intelligence features to government agencies, including the IRS, Secret Service, and DEA. Earlier this month, Coinbase vice president of global intelligence John Kothanek testified before a congressional panel that his company was eager to aid the cause of Homeland Security.
“If you are a cyber-criminal and you’re using crypto, you’re going to have a bad day,” Kothanek testified. “We are going to track you down and we’re going to find that finance and we are going to hopefully help the government seize that crypto.” Coinbase’s government work has proved highly controversial to many crypto fans, but the backlash has not dissuaded Coinbase from seeking out such cooperative efforts.
In light of the developments in cryptocurrency transaction enhancements in the federal government, it is imperative that anyone who engages with the cryptocurrency markets take special care in recording their dealings and filing their tax statements correctly.
The government knows that they lose out on a substantial amount of tax revenue every year as a result of their inability to keep up with the technological sophistication of the markets. This is why they make concerted efforts, such as those discussed above, to keep pace with those who might seek to evade tax liability.
This does not just apply to future filings. The government can also investigate your filing history, so it is possible that you may need to take steps to evaluate filings that you have already made without issue.
To learn more about your compliance status and what you can do to fix these critical issues before the government gets involved, it is important to have the help of a Dual Licensed Tax Lawyer and CPA.
By calling our Dual Licensed Tax Attorneys and CPAs today at (800) 681-1295, you can get the immediate help you need through a first-time case evaluation at a reduced rate.