Hi, everyone. This article will feature news that the IRS is partnering up with companies to track/trace Bitcoin users, and a brief overview of why Bitcoin is not fully anonymous.

The Anonymity of BTC

Bitcoin is not fully anonymous; however, it is somewhat anonymous when compared to services like Credit Cards or Banks. Sometimes, people like to label Bitcoin as anonymous because in order to move money, personal information is not necessary. While this is, on a certain level, true, there are many other factors which make Bitcoin not as anonymous as you think.

The first myth is that on Bitcoin, nobody else can see your transactions/amounts. This is completely false, and most users who know a bit about how Bitcoin works realize that every single transaction that happens on Bitcoin is stored permanently and publicly on the blockchain. This means that for any transaction you do, literally anyone can see which wallet you sent the money to, and the amount you sent.

The second myth is that if you use an HD wallet, or use one address per transaction (with 'change' addresses), those addresses can't be linked together to one BTC holder. While using an HD wallet or one address per transaction is a great way to protect your privacy, it's not foolproof. Welcome to Bitcoin Transaction Graph Analysis. TGA involves multiple rules or guidelines that programs and analysts can use to link together wallets and transactions. Simple rules of TGA include the below:

• For transactions with multiple input addresses, assume the input addresses are controlled by the same holder.
• If one (and only one) of the output addresses has never been used for transactions before on the blockchain, assume it's the 'change' address (to collect extra output for HD wallets).
• For transactions with change addresses, the real recipient usually receives an amount of bitcoins with lower precision than the change address. For example, if I have 3.14159 BTC in one of my HD wallets and I want to send 2 BTC to Paul, my HD wallet would send 2 BTC to one address, and 1.14159 BTC to another address. The TGA program could then use this to guess that the 2 BTC was sent to the actual recipient and that the other weird amount was sent to a change address.

While some of these basic rules can be circumvented through everyday methods, TGA includes a whole branch of more complex ones to link together accounts.

The third and final myth is that your Bitcoin wallets can't be linked to your personal identity. This is almost always false, because most exchanges that provide BTC in most countries require your personal identity to prevent fraud. Most exchanges and services also use unique Bitcoin addresses per customer. This means that it's simple for the IRS, FBI, or anyone who wants to know who you are to find an exchange address you used to send/receive BTC and find out your identity. Nearly every major exchange from Coinbase to Gemini needs your personal identity, and it's not hard for law enforcement or others to find out what it is.

Additionally, if you run a full node or even if you don't, the IP address of the node that transmitted your transaction is somewhat telling as well. If you run a full BTC node and broadcasted your own transaction, that transaction can somewhat be traced back to your IP and unless you use some sort of VPN or IP Shielding, it's definitely possible to trace your IP to your identity.

IRS Hiring Companies to Track BTC Users

The IRS is not happy about the many tax evaders that use Bitcoin, and is constantly scouring for ways to trace down such violators. As we've covered, BTC is pseudonymous, not anonymous, and the IRS knows this too; that's probably why the IRS has recently hired crypto data analysis company Chainalysis to unmask the people behind Bitcoin transactions and wallets.

Chainalysis uses many data sources to link Bitcoin nodes/wallets/transactions to real people, including the dark web, exchange data, and public websites. While Chainalysis likely does work to some extent, there are ways to increase your anonymity using Bitcoin, including the usage of mixers to tumble up your coins.

Bitcoin mixers are services that tumble up coins using mass transactions in order to mask the source of the coins. However, you have to trust the mixer itself to delete your information after usage. Using an HD wallet also will bump up your privacy by allowing you to transact using multiple inputs/outputs and wallets. Chainalysis probably works best for users who haven't tried to mask up their Bitcoins.

Chainalysis is also claiming huge amounts of analyzed data, covering one-fourth of all Bitcoin addresses. The IRS hopes Chainalysis along with other tools will help track down criminals and tax evaders using Bitcoin.

Conclusions

Some other cryptos and altcoins are made with privacy/anonymity in mind, such as Monero, Dash, ZCash, and Bytecoin. Using coins such as these would greatly boost your privacy/anonymity as well. But although Bitcoin isn't fully private/anonymous, it's much better than normal credit cards.

Currently the most anonymous way to transfer money in my opinion is physical cash, and though some cryptos aren't near that level yet, many cryptocurrencies are offering privacy/anonymity features we've never seen before.

If you liked this article, be sure to resteem/follow/upvote :)

Thanks,
— @mooncryption

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note: I don't actually recommend using features such as mixers as they could be scams and they're not surefire ways to protect your anonymity. Additionally, I do not support tax evasion or anything like that in any way. Though Bitcoin is currently in a weird gray area in terms of regulation and taxes, it's important users learn what restrictions and tax rules are in place for them in their country :)

credits: The front image is modified, and the original is from Coinify.com.