All Bitcoin transactions are recorded on a public ledger called the blockchain, so anyone can look up when, where, and how much Bitcoin was sent. But the real question is – can someone connect those transactions to your identity?
Governments, the IRS, and law enforcement agencies have spent years trying to figure out how to track crypto (Bitcoin included) and, many times, they managed to be successful. They’ve captured criminals who thought they were being oh-so-smart using Bitcoin, and even regular people had some explaining to do regarding Bitcoin.
So, how traceable is Bitcoin really? Keep reading and you’ll see if the IRS and FBI follow the money, and if it’s not fully anonymous, what you can do about it.
How Bitcoin’s Pseudonymity Works
If you’re wondering how to learn about Bitcoin, start by researching privacy. Many assume Bitcoin is anonymous, but in reality, it’s only pseudonymous.
This means that, while the transactions don’t quite show your name, they can still be traced back to you. The transaction history is visible to literally anyone, so it’s possible to track transactions if you follow the movement of Bitcoin from one wallet address to another.
These crypto transactions don’t include personal details by default, so it makes sense that people think they’re private. The thing is, once a Bitcoin wallet or crypto address is linked to a person (which is done by a purchase, a centralized exchange, or poor privacy practices), it’s much easier to uncover their identity.
Bitcoin wallets have a public key and a private key. The public key generates multiple addresses that appear on the blockchain, and the private key acts as a password and allows you to send Bitcoin. You can create a new Bitcoin address for each transaction, which makes it harder to link transactions together. Unfortunately, a lot of people don’t do this, and it results in transaction patterns that make tracking a lot easier.
Although Bitcoin itself doesn’t require you to verify your identity, most people buy or sell it through cryptocurrency exchanges, and they enforce KYC data collection. These centralized exchanges require users to submit personal identification, which means their actual identity gets linked to their transactions. Once you withdraw Bitcoin from any of these platforms, and transaction you make in the future that involves those funds can be traced.
All in all, there are methods to make the transactions more private, but if you want to stay completely anonymous, Bitcoin traceability will surely stay a concern.
Comparing Public and Privacy Coins
Some cryptocurrencies are more private than others. Law enforcement, financial institutions, and government agencies keep an eye on blockchain technology to track Bitcoin and other digital assets. But there are privacy coins that protect their users’ anonymity more, which makes it harder to track crypto.
Let’s compare them to Bitcoin.
Bitcoin
With Bitcoin, every transaction is recorded and visible. Although no actual names are attached to corresponding wallet addresses, advanced blockchain analysis tools are still able to connect transactions to the people making them.
Bitcoin is only pseudonymous, meaning not truly private.
Monero
Monero hides all transactions by default. It uses stealth addresses, ring signatures, and confidential transactions to disguise both the sender and receiver, which makes it almost impossible to see the transaction history. For those that want privacy above all, Monero has quickly become the preferred option.
The issue, however, is that its focus on anonymity has drawn attention from law enforcement because it could potentially be used for illicit transactions.
Zcash
Zcash has optional privacy, which means you can choose between transparent and shielded transactions. It uses zero-knowledge proofs to verify transactions without revealing any details about the sender, the recipient, or the amount.
A big chunk of Zcash’s transaction history is visible because many users don’t enable the privacy features, though. This means that Zcash is more accessible for use on crypto exchanges, but there’s not as much anonymity with it as with Monero.
Dash, Grin, and Others
Dash has a feature called PrivateSend, which mixes multiple transactions together to make tracking harder. Grin uses the Mimblewimble protocol that improves scalability and reduces the visibility of transaction data. There are also other privacy coins, all of which have their own ways of protecting details on transactions.
But although they’re more private than Bitcoin, none of them are as anonymous as Monero.
Can the IRS Track Cryptocurrency Transactions?
Some people think Bitcoin can be used for tax evasion, but the IRS has tools to trace crypto transactions and see where the money goes. Major centralized exchanges like Coinbase, Binance, and Kraken have to follow tax laws, which means they report what their users do to the IRS. If someone buys, sells, or trades Bitcoin on these platforms, tax authorities get those records.
The IRS also works with blockchain analysis firms like Chainanalysis and CipherTrace to monitor transaction trails and see what can be taxed. Under U.S. law, taxpayers have to report Bitcoin earnings, whether they concern trading, mining, or spending, and there are ways to enforce this. The IRS has issued subpoenas to crypto exchanges in which they demand customer transaction data so see who is underreporting their income.
Some try to be more private and decide to use Bitcoin mixes or non-KYC decentralized exchanges, but that’s risky. Mixes can be flagged as illegal, and non-KYC platforms have lower liquidity and problems with security.
In short, there are ways to make transactions harder to trace, but the IRS has become more aggressive in tracking crypto, so if you’re looking to completely hide anything you do with Bitcoin, that will be pretty much impossible.
How Law Enforcement Tracks Bitcoin
The IRS isn’t the only agency interested in knowing what you’re doing with Bitcoin. Law enforcement is curious about it, too, and they’ve developed advanced techniques to monitor activity regarding Bitcoin. What’s more, they’ve also found ways to uncover the identity of the people using Bitcoin.
The law enforcement uses analysis tools on blockchains to dig into transaction patterns and detect activity that might be suspicious. Elliptic, Cyphertrace, and other companies of this kind provide forensic tracking services. They use cluster techniques to connect different transactions and trace them back to individuals. Authorities are pretty successful in using these methods. For instance, in the case of Silk Road, investigators seized millions in Bitcoin, and they’ve also managed to track funds in ransomware investigations.
But despite all this, there are those that still manage to fly under the radar because they use techniques to improve privacy. Coin tumblers, anonymous currency, and non-KYC platforms help obscure digital footprints, so law enforcement has to work harder to follow transactions. Of course, a foolproof method doesn’t exist and since every Bitcoin transaction is stored permanently, investigators are more than capable of analyzing past activity for years.
They wait for the user to make a mistake and then, they are able to link their identity to the funds.
How to Protect Your Privacy When Using Bitcoin
Bitcoin might not be totally anonymous, but you can still make your transactions harder to trace. With the right techniques, your Bitcoin transactions aren’t that likely to be linked to your identity.
Use a New Address for Each Transaction
Don’t use the same address over and over because this makes it easy to link transactions together and create a pattern that can reveal your personal information. When the same address is used all the time, anyone that analyzes the blockchain can see a clear connection between transactions and Bitcoin users. But when you generate a new Bitcoin address for every transaction, your break the link between payments and make it harder to track where your funds are going.
Use Wallets Focused on Privacy
Standard crypto wallets aren’t very private, but there are those that are designed to obscure transaction details. Wasabi Wallet and Samourai Wallet, for example, have advanced privacy features like CoinJoin. CoinJoin mixes multiple transactions together, which makes them harder to trace.
Wallets like these will also prevent you from using the same address every time and they have extra tools that make tracking more difficult. However, you’ll need a bit of technical knowledge to use them plus keep in mind that not all exchanges support transactions that have gone through mixing services.
Use Bitcoin Mixing and Tumbling Services
Bitcoin mixers (also called tumblers) break the connection between the sender and receiver. They blend multiple crypto transactions together. They take your Bitcoin, combine it with others, and send it back in different amounts, so it’s almost impossible to see where the funds came from.
As effective as this is, it’s not without risks. A lot of mixers operate in legally questionable areas, and some have even been shut down for allegedly facilitating money laundering. Also, some major exchanges flag coins that have gone through mixers.
Use the Lightning Network
The Lightning Network is a way to make Bitcoin transactions more private because it keeps them off the main blockchain. Lightning payments happen through private channels, so they don’t leave the same kind of traceable patterns.
However, the Lightning Network is still growing and compared to traditional Bitcoin transactions, its adoption is limited. Plus, while it improves privacy, it’s still not 100% anonymous because certain exit points can still reveal information.
FAQ
Is Bitcoin traceable?
Yes, because all transactions are recorded, so anyone can see them. Although Bitcoin addresses (wallet) don’t have personal details, Bitcoin transactions can still be linked to real people’s identities.
Can the government seize or freeze Bitcoin?
The government can’t directly freeze Bitcoin like they can a traditional bank account, but they can take action against people using Bitcoin and get access to their crypto wallets and private keys.
There’ve been cases where authorities have seized Bitcoin after they successfully tracked transactions, identified owners of the wallets, and obtained legal warrants to force exchanges or individuals to hand over access.
Conclusion
Is Bitcoin totally anonymous? No. Do you have to pay tax on it? In most cases, yes. Is any of this a real issue? Absolutely not, unless you have something to hide. And in that case, you’ll soon be faced with bigger issues anyway.
If you have an actual reason to want to stay private (nothing illegal, of course), privacy coins are always an option. There are, of course, also ways of making your Bitcoin transactions more private. Either way, don’t forget that nothing is foolproof and complete, total anonymity doesn’t truly exist in the 21st century.
This post may contain affiliate links. Financial Panther has partnered with AwardWallet and CardRatings for our coverage of credit card products. Financial Panther, AwardWallet, and CardRatings may receive a commission from card issuers. Some or all of the card offers that appear on the website are from advertisers. Compensation may impact on how and where card products appear on the site. The site does not include all card companies, or all available card offers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.
More Recommended Ebike/Scooters
Check out these other ebikes and scooters I've reviewed:
- Urban Arrow Ebike – Last year, I made one of the largest purchases I’ve ever made – I bought a $9,000 electric cargo bike from Urban Arrow. In my Urban Arrow review, I will discuss what it is and why I decided to buy this bike, as well as discuss how impactful a bike like this can be on your journey to financial independence.
- Troxus Explorer Step-Thru Ebike – The Troxus Explorer Step-Thru is a fat-tire ebike that I’ve had the pleasure of riding for a while now. It has amazing power, great looks, and awesome range. If you’re looking for a great fat-tire ebike that offers a lot for the price, the Troxus Explorer Step-Thru is definitely one for you to consider. Check out my Troxus Explorer Step-Thru Review.
- Hovsco HovBeta Ebike – The HovBeta is a folding ebike with great specs and a lot of interesting features, and importantly, it’s sold at a good price point. I’ve had a blast commuting with it and using it to do deliveries with DoorDash, Uber Eats, and Grubhub. Check out my Hovsco HovBeta Ebike Review.
- Vanpowers Manidae Ebike – The Vanpowers Manidae is a fat tire ebike that I’ve been riding as my primary winter commuting bike and have also been using it to do food delivery with apps like DoorDash, Uber Eats, and Grubhub. After clocking in a decent number of miles with this ebike, I wanted to write a post sharing what my experience with the Vanpowers Manidae ebike has been like. Check out my Vanpowers Manidae Review.
- Sohamo S3 Step-Thru Folding EBike Review – A Great Value Folding Ebike – The Sohamo S3 Step-Thru Folding Ebike is an entry-level folding ebike that offers a lot of value for the price point. I’ve been riding the Sohamo S3 for a while now, putting the bike through its paces, and I have to say, this bike has exceeded all of my expectations. Check out my Sohamo Review.
- KBO Flip Ebike – The KBO Flip is an excellent bike. I’ve had a great time riding it and think it’s a versatile bike that can be used for a lot of purposes and can fit a variety of lifestyles. It’s worked out great for me as a general commuter bike and as a food delivery bike. Check out my KBO Flip Review.
- Hiboy P7 Commuter Ebike – The Hiboy P7 is an excellent electric commuter bike that’s offered at an affordable price point. The range and speed of this bike are both very good, so you won’t have any trouble getting anywhere you need to go with it. As a food delivery vehicle, this is also good – with how much range it offers, you’ll be able to work all day on a single charge. Check out my Hiboy P7 Commuter Electric Bike Review.
- Himiway Escape Ebike – The Himiway Escape is an interesting bike for anyone looking for a moped-style ebike. If you’re a gig economy worker, the Himiway Escape is particularly interesting and it’s possible to think of it as an investment, especially if you can opt to do deliveries with the Himiway versus using a car. It’s not cheap, but you can definitely make your money back when you compare the mileage you’ll put on your car versus using an ebike. Check out my Himiway Escape Bike Review.
- Espin Sport Ebike – The Espin Sport is a good ebike for someone who is looking for an ebike that feels and rides more like a regular bike. There are many ebikes that are really only bikes in name. In reality, they’re basically electric mopeds. The Espin Sport, by contrast, is a bike you could probably ride without the battery and you’d feel like you’re just riding a regular bike. Check out my Espin Sport Review.
- Varla Eagle One Scooter – The Varla Eagle One is an excellent scooter that can make sense for a lot of people. It can work as a primary mode of transportation. You can use it to work on gig economy apps like DoorDash, Uber Eats, and Grubhub. And it can also be a recreational vehicle if you’d prefer to use it for that. Check out my Varla Eagle One Review.
- Varla Falcon Scooter – The Varla Falcon is an excellent scooter that offers a good amount of power at a lower price point compared to more powerful scooters. It’s not exactly an entry-level scooter, nor is it a high-powered scooter. I think it fits somewhere in-between those two categories – an intermediate scooter if I had to give it a category. Check out my Varla Falcon Review.
- Hiboy S2 Scooter – The Hiboy S2 is an excellent entry-level commuter scooter that's perfect for someone looking to save some money in transportation costs and improve their commute. Check out my Hiboy S2 Review.
- Hiboy S2R Scooter – The Hiboy S2R is one of the more interesting electric scooters I’ve been able to test out. It’s not a high-powered scooter, but for an everyday transport option, it’s very useful, especially given some of the unique features that it has. Indeed, for the price, the Hiboy S2R might be the best value scooter I’ve used. Check out my Hiboy S2R Review.
- Fucare H3 Scooter – The Fucare H3 is a fun scooter and I’ve enjoyed testing it out. For a daily commuter or quick trips or errands, the Fucare H3 is probably the scooter I’ll use. It’s portable and easy to maneuver, so it’s just easier to take on the road when I need it. Check out my Fucare H3 Scooter Review.
More Recommended Investing App Bonuses
For additional investing app bonuses, be sure to check out the ones below:
- M1 Finance ($100) – This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account. Check out my M1 Finance Referral Bonus – Step-By-Step Guide.
- SoFi Invest ($25) – SoFi Invest is an easy brokerage account bonus that you can earn with just a few minutes of work. Use my SoFi Invest referral link, fund your SoFi Invest brokerage account with just $10 and you’ll get $25 of free stock. I also have a step-by-step guide for the SoFi Invest referral bonus.
- Webull (20 free stock shares) – Webull's current promotion gives you 20 free shares valued between $3-$3,000 each if you open an account using my referral link. Here’s a guide I wrote about how to earn your free shares using Webull.
- Moomoo (15 free stocks) – Moomoo is a free investing app currently offering 2 different referral bonuses if you open an account using a referral link. Read my Moomoo referral bonus guide for more information.
- Robinhood (1 free stock) – Robinhood gives you a free stock valued between $2.50-$225 if you open an account using my referral link.
- Public (1 free stock) - Public gives you a free stock valued between $3-$70 if you open an account using my referral link.
More Recommended Bank Account Bonuses
If you’re looking for more easy bank bonuses, check out the below options. These bonuses are all easy to earn and have no fees or minimum balance requirements to worry about.
- Upgrade ($200) – Upgrade is a free checking account that’s currently offering a $200 referral bonus if you open an account and complete a direct deposit. These bonus terms are easy to meet, so it’s well worth doing this bonus as soon as you can. Here’s a post I wrote with more details: Upgrade $200 Referral Bonus – Step By Step Directions.
- Ally Bank ($100) – Of all the banks out there, Ally is, without a doubt, my favorite. At the moment, Ally is offering $100 to customers who open an eligible Ally account and meet the requirements. Here are the step-by-step directions to earn your Ally Bank referral bonus.
- Fairwinds Credit Union ($175) – Fairwinds Credit Union is offering a referral bonus for users that sign up using a referral link. Fairwinds has no fees or minimum balance, so this is a particularly easy bonus to earn. Since this is a smaller credit union, my gut instinct tells me this offer won’t be around long, so if you’re in a position to meet the bonus requirements, grab this bonus before it’s gone. Here is my step-by-step guide on how to earn your Fairwinds Credit Union bonus.
- Chime ($100) - Chime is a free bank account that offers a referral bonus if you use a referral link and complete a direct deposit of $200 or more. In practice, any ACH transfer into this account triggers the bonus. This bonus is easy to earn and posts instantly, so you’ll know if you met the requirements as soon as you move money into the account. I wrote a step-by-step guide on how to earn your Chime referral bonus that I recommend you check out.
- US Bank Business ($900) – This is a fairly easy bank bonus to earn, since there are no direct deposit requirements. In addition, you can open the Silver Business Checking account, which comes with no monthly fees. Check out how to earn this big bonus here.
- GO2Bank ($50) - GO2Bank is an easy bank bonus that I recommend people take advantage of if they have an easy way of meeting the direct deposit requirement. I like that it’s easy to open the account and that the bonus pays out quickly. Check out my step-by-step guide on how to earn your GO2Bank $50 referral bonus.
- Current ($50) – Current is a free fintech bank that’s offering new users a $50 referral bonus after signing up for an account using a referral link. Current is an easy bonus to earn and also gives you access to three savings accounts that pay you 4% interest on up to $2,000. That means you can put away up to $6,000 earning 4% interest. That’s very good and makes Current an account I recommend to everyone. Check out my step-by-step guide on how to earn your Current Bank bonus.
- Novo Bank ($40) - Novo bank is a free business checking account that’s currently offering a $40 bonus if you open a Novo business checking account using a referral link. In addition to being a good bank bonus, Novo is also a good business checking account. It has no monthly fees or minimum balance requirements and operates a good app and website. Indeed, it’s the business checking account I currently use for this blog. Check out my post on how to easily open a Novo account.
- Varo ($25) – Varo is a free fintech banking app similar to Chime or Current. It’s currently offering a $25 bonus to new users that open a new Varo account with a referral link. The bonus for this bank is very easy to meet, all you need to do is spend $20 within 30 days of opening your Varo account. Check out my step-by-step guide to learn how to earn this bonus.
Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
- 5% Savings Accounts. I'm currently getting 5.24% interest on my savings through a company called Raisin. Opening a Raisin account takes minutes to complete, it's free, and all of your funds are FDIC-insured. I explain how it works, why I'm now using it to store my emergency fund and any other cash savings I have, and why I recommend everyone check it out in this review.
- US Bank Business. US Bank is currently offering new business customers a $900 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
- Empower. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
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