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News Report

IRS Looking to Trace Crypto Transactions with AI

2 mins
Updated by Kyle Baird

In Brief

  • The IRS posted a notice that described its examination of technologies to enforce crypto tax regulations.
  • This includes applying AI and machine learning to publicly available info on cryptocurrencies.
  • In general, the IRS is stepping up its scrutiny of the crypto market.
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The IRS is looking to modernize its systems and use AI and machine learning to enforce compliance in the crypto market.

The US Internal Revenue Service (IRS) has published a new informational notice regarding its bid to trace crypto transactions.

The notice talks about using technologies like AI and machine learning on publicly available information to “determine potential use cases throughout IRS.”

The idea is that the IRS wants to automate processes and make regulation enforcement more streamlined. The sophisticated developments of the cryptocurrency market, and in general, technology has spurred the authority to keep up with the changes.

One overarching motivation hinted at by the posting is that the IRS wishes to digitize their system, moving away from paper-based processes. The AI and machine learning concepts will include utilizing chatbots to trace crypto transactions. The information posting reads,

“The IRS utilizes publicly-available sources of information regarding cryptocurrency, and an initiative to bring in public, open source data for necessary deconfliction and analytics could demonstrate value to the Service.”

Recently, the authority issued a John Doe Summons for users of the Poloniex exchange. It did not allege any wrongdoing on the part of the exchange, but rather just wished to know users who had transacted more than $20k worth of assets.

IRS taking steps to ensure crypto compliance

The IRS has made some statements with regard to issuing tax guidance. Other countries have done the same, most recently the United Kingdom. South Korea was one of the first to propose rules for cryptocurrency taxation.

Still, as can be seen in the UK tax guidance, the process is not easy. There is a fair amount of open endedness when it comes to taxing certain activities, like mining and staking. Specific tokens like exchange’s native tokens also prove to be a challenge.

Privacy coins, in particular, have proven to be the bane of governments that are still deliberating how to handle them. South Korea was one of the first nations to ban privacy coins outright.

The IRS has previously offered a grant worth $625,000 to CipherTrace to help crack Monero’s privacy protocol.


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