What's the primary source? All I see is people in a thread saying 'they said this' but providing no linkage.
EDIT:
OK, so there were two articles linked, one on Wired and one on Businessinsider.
http://www.wired.com/2014/03/irs-bitcoin/http://www.businessinsider.com/irs-bitcoin-is-property-not-currency-full-release-2014-3The Wired article mentions that the IRS can link bitcoin addresses to people when they sell at an exchange or at a retailer that accepts bitcoin. So basically they find an instance of where the person transacted bitcoin for currency or goods, and use that as a reference point to build a tree of possibly linked addresses.
The Businessinsider article is basically just talking about how the IRS sees bitcoin as a property and not as a currency, thereby making it subject to capital gains tax. And also the burden of having to record each transaction for tax purposes.
ADDITION:
I'll add in this post on reddit which links to an academic paper describing how it's possible to link IP addresses to bitcoin addresses.
http://www.reddit.com/r/Bitcoin/comments/27a3eb/deanonymisation_of_bitcoin_clients/The attack can reveal the public IP address of the user who generated a transaction as well as the entry nodes which connect the user's node to the rest of the Bitcoin network. In the case of users behind NAT (the most common case in the current Bitcoin network) the IP address is an address of the user's ISP which in some cases may correctly point to the user's street or even home*.
See this paper, section 2 for a Survey of IP Geolocation Techniques. Some accuracy tests of a GeoIP2 City database can be found here.
One may argue however that a large ISP may serve as a good anonymizer, moreover a more careful user may go through multiple VPNs, or through anonymity network like Tor, and thus IP geolocation would be irrelevant in his case. This is true, but the less obvious bit is that the set of entry nodes would still serve as a unique user ID in all these seemingly anonymous cases. Knowing even only three of these nodes (out of total eight in most cases) serves as a unique user ID for the duration of a session (until Bitcoin client software is closed or until the computer is switched off). The crucial idea is that when a user generates a transaction the entry nodes are very likely to be among the first to forward the transaction. We show that the set of entry nodes can be learned at the time of connection and then used to identify the origin of a transaction and link transactions made during one session even if they belong to new or unrelated public keys in the transaction graph.
The attack targets the anonymity of Bitcoin users on the network level and is complementary to what can be found via transaction graph analysis. We also show that the attacker can ban all Tor exit nodes (or public proxies) by exploiting Bitcoin's anti-DoS protection.
The attack may consist of the following steps:
1. (Optional) Ban connections to Bitcoin network from Tor (or target public proxy service) by sending malformed messages through each Tor exit node to each Bitcoin peer server (i.e. Bitcoin peer accepting incoming connections).
2. Establish many connections to each Bitcon server (about 50). All connections can be established from a few machines, the number depends on how stealthy the attacker wants to be.
3. Listen to the clients advertising their address on the connections established during step 2 and for each client's IP address save the peers from which the advertised address is received; we call these nodes entry nodes, even 3 of them uniquely identify the client.
4. Listen for transactions. If a transaction is first relayed by a subset of entry nodes of some client, mark the transaction as belonging to this client.
The attack requires only a few machines that establish a certain number of connections by Bitcoin protocol and log the incoming traffic. In a concrete example, an attacker with a few GB of storage and no more than 50 connections to each Bitcoin server can disclose the sender's IP address in 11% of all transactions generated in the Bitcoin network. If the attacker allows a slight DoS of the network, he may achieve deanonymization rates up to 60%, which has been confirmed by the experiments in the Bitcoin test network. We estimate the cost of the attack on the full Bitcoin network to be under 1500 EUR per month.
Paper Synopsis:
https://www.cryptolux.org/index.php/BitcoinFull Paper:
http://arxiv.org/abs/1405.7418If you add these together the summation is that Bitcoin is not really all that anonymous.
Am I correct to presume Darkcoin has dealt with the problem discussed in the academic paper?
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