Can cryptocurrency be traced? (2025)

How do cryptocurrency transactions work?

Even though cryptocurrency is pseudonymous, the public nature of the blockchain makes transactions easy to trace.

Every cryptocurrency transaction is recorded on a public ledger called the blockchain. These ledgers are designed to be immutable and transparent — meaning they can’t be edited, and anyone can view them using a blockchain explorer. 

Here’s how it works:

1. When you buy/sell/send crypto, the transaction is broadcast to the network.
   
2. Once the transaction is confirmed, it’s added to a block on the blockchain that cannot be changed or altered.
   
3. This record is visible to anyone — not just the sender and recipient.

 If an individual or government agency can link a wallet address with your identity, they can track your transactions. 

Are Bitcoin transactions anonymous?

Bitcoin wallets are pseudonymous — which means they don’t require you to attach your name, email, or identity to a wallet. 

However, every transaction you make from that wallet is publicly visible and permanent. 

If a wallet is ever connected to your real-world identity, all associated transactions can be linked back to you. 

How can my identity be traced to an anonymous wallet? 

Let’s say you send 1 BTC from your cold wallet to Coinbase (a centralized exchange that collects KYC data). Here’s how government agencies can potentially identify you as the wallet owner: 

• Coinbase has your KYC information identifying you as the account holder
  
• The IRS and other government agencies obtain KYC information through 1099 forms or subpoena
  
• Because you transferred between the two, blockchain analytics firms can link your cold wallet to your Coinbase account 

Can the IRS track cryptocurrency?

The IRS can track cryptocurrency. In recent years, the IRS has invested heavily in blockchain analysis — working with contractors like Chainalysis to track transactions. 

Starting in 2026, new regulations will require all cryptocurrency exchanges — centralized and decentralized — to issue Form 1099-DA — a reporting form that shows users’ capital gains and losses, similar to a stock broker. This means that the IRS will have more resources at its disposal to track taxable income from crypto. 

Here are the tools that the IRS uses to track unreported income: 

• Exchange records: Exchanges with KYC policies issue 1099 forms and hand over your information to government agencies upon request. 
• Blockchain analysis: The IRS works with companies like Chainalysis to map wallet behavior and detect undeclared income.
• Legal tools: In the past, the IRS has issued John Doe Summons to get exchanges like Coinbase and Kraken to hand over customer data. 
• Whistleblower programs: The IRS has a whistleblower program for unreported tax income. Whistleblowers are eligible to receive 15-30% of the proceeds collected. 

You should report your crypto taxes to stay compliant and avoid the penalties of tax evasion — including fines, penalties, and even potential jail time. 

Can the FBI trace cryptocurrency?

In 2021, the FBI recovered $2.3 million in Bitcoin that the company Colonial Pipeline had paid as ransom to a hacker group. Within weeks of the ransom payment, the agency had tracked the funds and seized the hackers’ private keys.

According to representatives from the FBI, cryptocurrency’s transparency makes it easier to trace than cash or even traditional bank transfers — especially once an address is flagged.

Unlike international wire transfers that often take weeks or even months to uncover, Bitcoin can be tracked globally and in real-time.

Why are Bitcoin transactions permanent? 

Bitcoin transactions are designed to be permanent to make it easier to trust decentralized money. Let’s walk through some of the pros and cons of Bitcoin's design. 

Why it’s good:

• Immutable records prevent fraud
• Anyone can independently verify transactions 
• No central authority required to verify transactions 

Why it’s dangerous:

• No reversals for scams or incorrect wallet addresses 
• Easy to trace wallet address activity 

How do I trace a Bitcoin account holder?

While it’s difficult for an individual to uncover the holder of a Bitcoin wallet address, investigators typically use the following: 

• KYC links: If a wallet transacts with an exchange account linked to an individual’s identity, it’s a clue that the wallet might be owned by the same person. 
• IP tracking: Wallet addresses can be tracked from IP addresses from app logins or node activity.
  Off-chain metadata: Emails, leaked wallet addresses, or social media posts can be used to identify wallets. 
• Transaction clustering: Some analysts may be able to identify transaction patterns when the same entity owns multiple wallets. 

Can hardware wallets be traced back to the owner?

It’s possible that a hardware wallet can be traced back to its owner. Remember, these wallets leave digital and physical traces, including the following: 

• IP addresses used when setting up or updating your wallet
  
• Shipping records if you ordered directly from the manufacturer
  
• Connected wallets that may have touched KYC exchanges
  

What crypto is untraceable?

While most crypto is traceable, privacy coins and coin mixing services can be used to make cryptocurrency untraceable. However, it’s important to note that governments have been cracking down on these tools. 

Examples:

• Monero (XMR): Unlike ‘public blockchains’ like Bitcoin and Ethereum, Monero is a private blockchain designed to keep transactions private. 
• Zcash (ZEC): Zcash uses zero-knowledge proofs to hide user information. 
• Tornado Cash: A smart contract that ‘mixes’ funds with others to obscure the trail. 

In recent years, these tools have attracted regulatory scrutiny. In 2022, Tornado Cash was sanctioned by the U.S. Treasury — making it illegal for US residents to own. In addition, Monero has been delisted by most major exchanges. 

It’s highly recommended that you steer clear of privacy coins and coin mixing services due to regulatory issues. 

Tips to keep your transactions private 

Here are a few tips to keep your crypto transactions private while staying compliant with the law. 

Use a VPN or Tor: Using a VPN or Tor can keep your IP address private — protecting your identity. 

Don’t reuse wallet addresses: Bitcoin wallets typically give you a new address each time you have an incoming transaction. It’s important not to re-use wallet addresses as this makes it easier for someone to link it to your identity. 

Be careful with combining funds: Remember, if one wallet can be linked to your identity, it’s possible that any other wallet you transferred cryptocurrency to could be compromised as well. 

Minimize use of centralized exchanges: Consider minimizing your use of centralized exchanges that collect KYC information. At this time, DeFi protocols and hardware wallets do not require you to submit personally identifying information (though this may change soon due to the introduction of 1099-DA requirements in 2026). 

In conclusion 

Remember, cryptocurrency transactions can be traced. That’s why it’s important to report your cryptocurrency transactions on your tax return and stay compliant with rules and regulations.