Cryptocurrencies haven’t yet been regulated in the United States, but the industry has expanded far enough to be monitored by multiple government agencies. On many occasions we have seen the U.S. Securities and Exchange Commission crackdown on crypto-based entities; similarly, the U.S. Internal Revenue Service (IRS) has also been poking the crypto space.
The financial watchdog started the year off with some guidelines on how crypto owners should file their 2019 tax returns. This was the first time cryptocurrency was included in the tax form 1040. The IRS clarified that taxpayers must keep records of “receipts, sales, exchanges or other dispositions of virtual currency and the fair market value of the virtual currency.”
Now, the IRS wants to strengthen its reach in the industry with a crypto investigation pilot program. The agency has put out a call for information about tools that it can use to track various crypto transactions as part of the investigative pilot program.
Details about the program have been published in a request for information that was made public on June 30. According to the documents, the program has several areas of focus that include privacy coins and layer-2 transaction protocols like the Lightning network.
A part of the document reads:
“This RFI is associated with a pilot IRS Criminal Investigation Division (CI) program. CI Cyber Crimes is requesting information about systems that will allow developers and testers to conduct investigative research of distributed ledger transactions involving privacy cryptocurrency coins (e.g., Monero (XMR), Zcash (ZEC), Dash (DASH), Grin (GRIN), Komodo (KMD), Verge (XVG), and Horizon (ZEN)); Layer 2 off-chain protocol networks (e.g., Lightning Network (LN), Raiden Network, Celer Network); Side-chains (e.g., Plasma and OmiseGo); and tracing challenges following the integration of the Schnorr Signature algorithm.”
A blessing or a curse?
The IRS expects that these tools would prove useful during investigations by providing complete transparency about the transactions it traces. Based on the increased criminal activity within the crypto space, a platform like this would provide useful when recovering lost funds and tracking criminal rackets.
This would greatly contribute to increasing the legitimacy of this space. However, this would also provide a centralized body the power that renders the primary feature of cryptocurrencies, anonymity, useless.
“Acquiring applications to allow an investigation to more easily trace privacy coins and other protocols that provide anonymity to illicit actors would allow investigations to be more effective, as well as facilitate a higher level of deterrence by making it harder to conceal criminal activity. It also provides an investigative efficiency that is currently limited,” the document elaborates.
The notice outlines that “there are few investigative resources for tracing transactions” in these areas that and “[t]he CI Cyber Crimes program is working to get in front of this trend through this RFI.”
The agency also noted that “[e]ven though Layer 2 protocols have been dismissed by many in the investigative support community, there is clear evidence that this is a growing network.”
As of now, potential bidders have until July 14 to submit their responses.
Looks like the IRS is making it public that it wants to enhance its investigative capabilities. The agency had previously announced that it wanted $40.54 million to “Expand Cyber and Virtual Currency Compliance Efforts,” according to public documents.