Criminals Deploy 'Emerging Digital Technologies' in Tax Evasion Schemes: Chainalysis Report
Authorities in Italy exposed a tax fraud operation where a suspect reportedly leveraged Bitcoin Ordinals alongside the BRC-20 token standard to create and hide $1.1 million in unreported gains.
Individuals attempting to evade taxation have increasingly turned to Bitcoin Ordinals, BRC-20 tokens and various other digital mechanisms as they seek to conceal their assets from revenue authorities, a new report from blockchain analytics platform Chainalysis reveals.
"Tax evasion and unreported income are age-old financial crimes, but the methods used to commit them are rapidly evolving," Chainalysis stated in a report Wednesday.
"As digital assets become more mainstream, bad actors frequently attempt to exploit novel technologies — such as NFTs, decentralized finance protocols, or emerging token standards — in hopes of keeping their wealth hidden from tax authorities and law enforcement."
Revenue collection agencies have found themselves racing to keep pace with technological innovations and to monitor and enforce taxation. Research conducted in March estimated that between 32% to 56% of US crypto owners report their gains. In Norway, that percentage was only 12%, according to a study from August 2024.
Authorities in Italy expose $1 million tax fraud operation
According to Chainalysis, Italy's Economic and Financial Police Unit in Foggia reportedly exposed a tax evasion scheme where an individual allegedly leveraged Bitcoin Ordinals along with the BRC-20 token standard to conceal 1 million euros ($1.1 million) in capital gains that went undeclared.
Launched in 2023, the Ordinals protocol applies a serial number to a satoshi, which represents the smallest unit of Bitcoin, and enables data, including images or text, to be inscribed in a Bitcoin transaction. The BRC-20 standard, which is built on top of it, enables text inscriptions to be deployed, minted into tokens and transferred on the Bitcoin blockchain.
Authorities in Italy uncovered during their probe that the individual in question was utilizing the Ordinals protocol along with the BRC-20 standard to generate tokens, then transmitted them and posted them on marketplaces, according to Chainalysis.
"The assets were sold for multiples of their original cost, and the profits were routed back to the suspect's primary wallet in Bitcoin," Chainalysis said. "The suspect continually reinvested these earnings into new inscriptions."
Blockchain intelligence essential infrastructure
The US Internal Revenue Service calculates that the gross tax gap, which represents the government's best estimate of the total tax it is legally owed but did not receive, stands at about $606 billion. Strategies for evading taxes typically include paying in cash and underreporting income.
Nevertheless, Chainalysis indicated that utilizing crypto for tax evasion comes with a "fatal flaw" because of the "inherent transparency of the blockchain. No matter how sophisticated a scheme appears, the underlying technology leaves a permanent immutable trail."
Blockchain intelligence has the capability to reconstruct a financial network and cross-reference it with data that crypto exchanges are required to report to unmask transactions tied to suspected tax dodgers, according to Chainalysis.
"This landmark Italian case serves as a powerful reminder for law enforcement and compliance professionals globally: the technical novelty of crypto does not equal anonymity," it said.
"As new digital asset classes continue to emerge and generate income streams, the gap between actual on-chain wealth and declared tax positions will become a primary target for global investigative attention. In today's financial landscape, blockchain intelligence is essential infrastructure."