Bitcoin (3Dsculptor/

IRS uses tech to track bitcoin transactions

To help track down bitcoin owners who avoid paying taxes on their digital currency, the IRS has enlisted some help.

According to documents obtained by the Daily Beast, the IRS began using Chainanalysis’ Reactor application in 2015 to analyze bitcoin services and transactions so it can identify individuals who are laundering money or concealing income.

With Reactor, IRS investigators can create custom clusters of bitcoin addresses to spot transaction patterns. Through the application programming interface, users can upload data related to any bitcoin address to determine connections across multiple databases where bitcoin is bought, sold and exchanged.

With information on 25 percent of all bitcoin addresses tied to real-world identities, Chainanalysis claims that it can account for approximately 50 percent of all bitcoin activity.

In March 2014, the IRS issued guidance on treatment of convertible virtual currencies such as bitcoin for federal tax purposes. Taxpayers are required to determine the fair market value of virtual currencies in U.S. dollars on the date of receipt.

However, the agency faced criticism in a September 2016 audit by its inspector general, which called for the IRS to develop a virtual currency strategy to ensure taxpayer compliance. In response, the agency’s Criminal Investigation unit agreed to coordinate with other IRS divisions to promote fraud awareness and provide training related to virtual currency compliance by Sept. 30, 2017.

According to contract information provided by the General Services Administration, the IRS has extended its relationship with Chainanalysis to September 2018 with two awards by the agency’s Midwest region.

About the Author

Sara Friedman is a reporter/producer for GCN, covering cloud, cybersecurity and a wide range of other public-sector IT topics.

Before joining GCN, Friedman was a reporter for Gambling Compliance, where she covered state issues related to casinos, lotteries and fantasy sports. She has also written for Communications Daily and Washington Internet Daily on state telecom and cloud computing. Friedman is a graduate of Ithaca College, where she studied journalism, politics and international communications.

Friedman can be contacted at or follow her on Twitter @SaraEFriedman.

Click here for previous articles by Friedman.

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