(Franz Walker) The Internal Revenue Service (IRS) wants access to tools that can crack crypto wallets of erstwhile digital tax evaders.
The IRS’s Criminal Division Forensics Unit released a request for information (RFI) looking for “reliable” tools and processes to crack the crypto wallets used by many to store their cryptocurrency fortunes.
“Though a few known cyber penetration testers have published vulnerabilities on specific devices, the process of decrypting the hardware devices to gain access to the wallets has been challenging,” the RFI states.
In addition to purchasing tools capable of cracking these wallets, the IRS also wants to help “mature the process” to “obtain reliable results.”
Anonymity makes crypto transactions hard to audit
Cryptocurrencies, such as Bitcoin and Dogecoin, are decentralized digital currencies that aren’t tied to a single central bank or service provider. Just like real-world currencies, they have fluctuating market rates that can be traded for other currencies.
Their rise coincided with the invention of the blockchain, a distributed ledger that allows for transparency while at the same time providing the user with anonymity.
The anonymity provided by blockchain already makes it hard to track who is buying what with cryptocurrencies.
But for an added layer of security, some cryptocurrency traders use crypto-wallets. These keep the private keys needed to access their cryptocurrency separate from the broker making the transaction.
These wallets usually take the form of a segmented app with an extra layer of security. Another option is a separate piece of hardware, such as a thumb drive, that stores the private keys offline until needed.
The tool and processes that the IRS’s Digital Forensics Unit wants developed should be usable for any crypto wallet on the market. This includes both software and hardware models.
This is driven home by the RFI’s requirement that any tools and processes submitted have the ability to analyze software and firmware, reverse engineer hardware and “deconstruction of printed circuit boards and integrated circuit packages.
In addition, the contract will look to validate cybersecurity research in cryptographic wallets exploitation and identify successful cryptographic models for exploits. It also seeks to document processes, hardware and skillsets needed to reproduce results in an advanced digital forensics laboratory.
Finally, the IRS also wants to create hands-on training for the techniques and tools developed through the RFI.
Treasury Department proposes new rules for crypto reporting and taxation
The IRS’s Digital Forensics Unit’s RFI comes as the Department of the Treasury released a report proposing new reporting requirements for transactions, including cryptocurrency transactions.
Under the Treasury Department’s proposed plan, payment settlement providers, financial institutions as well as digital asset exchanges and custodians would be required to report any gross inflow and outflow that exceeds a specific threshold, for both business and personal accounts.
Both crypt0-asset exchanges and payment settlement entities are included in the plan to prevent taxpayers from switching to crypto platforms in an effort to evade scrutiny by the IRS.
The new reporting requirements specifically address cryptocurrency and crypto-asset exchanges stating: “[c]ryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”
Currently, cryptocurrencies, such as Bitcoin, are classified as property. This means that they’re only subject to capital gains taxes, meaning crypto holders only owe taxes when those gains are sold. Traders still need to report the income themselves though, given the capability to buy and sell cryptocurrencies on platforms outside the U.S., evading having to pay the proper tax can be quite simple.
Under the new reporting regime, businesses would be required to file a report with the IRS whenever they receive a cryptocurrency payment with a fair market value of over $10,000 so that they can be subject to tax. This mirrors existing rules which require businesses to report real-world currency and certain cash-equivalent payments of more than $10,000.
The Treasury Department estimates that the new reporting requirements will take effect in tax year 2023. This should give the IRS and financial institutions sufficient time to prepare.