The Empire Strikes Back, Part 1 – At Bitcoin


One of the uncertainties with cryptocurrencies has always been how governments would react once bitcoin and its kin got big enough to actually threaten the monopolies of national fiat currencies.

That day seemed to be approaching as cryptocurrencies’ aggregate market cap blew through $100 billion and the pipeline of new bitcoin wannabes (initial coin offerings, or ICOs) swelled into the hundreds. Even – in a classic sign of a bubble top — Paris Hilton got involved:

Hotel Heiress Paris Hilton Is the Latest Celebrity to Promote an ICO

(Coin Desk) – Celebrity heiress and reality TV star Paris Hilton has taken to Twitter to announce her participation in a token sale, or ICO.

Called Lydian, the venture claims the project is developing “blockchain driven technologies to reduce ad fraud and to maximize the effectiveness of ad marketing expenditures.” The idea has been floated by a number of projects of late, including efforts backed by advertising industry participants.

In the tweet, Hilton wrote:
Looking forward to participating in the new @LydianCoinLtd Token! #ThisIsNotAnAd #CryptoCurrency #BitCoin #ETH #BlockChain pic.twitter.com/a8kT9eHEko
— Paris Hilton (@ParisHilton) September 3, 2017

Lately, governments have indeed begun to defend their turf. The US Internal Revenue Service decided that since cryptocurrencies were clearly not money (only the dollar is money!) they must be commodities, which means every transaction creates a taxable gain or loss. In August the IRS drove the point home by unveiling software that can track supposedly anonymous crypto transactions:

The IRS Has Special Software to Find Bitcoin Tax Cheats

(Fortune) – One benefit of using bitcoin is the digital currency can be anonymous—its owners can move money around the world without revealing who they are. Well, in theory at least. In reality, bitcoin is less secret than people think.

The latest reminder of this comes via a report that the Internal Revenue Service is using software to unmask bitcoin users who have failed to report profits. According to a contract unearthed by the Daily Beast, the IRS is paying a company called Chainalysis to help identify the owners of digital “wallets” that users employ to store their bitcoins.

In a letter to the IRS, the co-founder of Chainalysis says the company has information on 25 percent of all bitcoin addresses and that it deploys millions of tags to help track and identify transactions.

The decision by the IRS to license the software of Chainalysis, which is based in Switzerland with an office in New York, appears to be part of the agency’s larger campaign to target digital currency users who have failed to pay tax.

As Fortune reported earlier this year, the IRS claims only 802 people declared a capital gain or loss related to bitcoin in 2015. This is significant since the price of bitcoin soared from around $13 to over $1100 between 2013 and 2015, and hundreds of thousands (like millions) of Americans bought and sold digital currency during this time—in other words, there are many people who face bitcoin-related tax trouble, and the IRS is tracking some of them down.

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