If memory serves me correctly, they have their own blockchain analyzer and tracer. However, something like Wasabi Wallet might make the IRS's job a bit harder and keep them a little more honest perhaps.
I've also been wondering, how do they look at these millionaires who cash out from before KYC was a thing?
These millionaires have lawyers and tax advisors on their payroll, who provide them with solutions to what you are talking about. Instead of asking in a forum, they ask their lawyers about the doubts you mention.
Besides, you are taking a lot of things for granted, which need not be the case:
The gov going to arrest them because they cant prove how they bought them?
Not in all cases are millionaires going to be unable to prove that. And in any case, most of them legalized their situation long ago, not now. Look at the Winklevoss twins for example.
Yeah I mean if crypto makes me a millionaire I'd be sure to talk to tax lawyers if I wanted to stay in the US. There is no point right now as I'm probably at a huge loss. However, from the sounds of it, it sounds like the gov is literally out to try to get you even if you do that. Like face the risk of hiring a lawyer and getting charged and possibly convicted of something anyways so is it really even worth it? Moving to another country would suck but at least you'd be free from unfair tax laws from a literally evil government that tries to punish you for doing the "right" thing and being law abiding. Since having private bitcoin isn't illegal, nor is not saving receipts of purchase.
And I was under the impression a lot of bitcoin out there is still in the unknown. As in there are holders of it who have not revealed they own it. Is that really all a thing of the past? I heard that some years back that a lot of bitcoin addresses are held by unknown entities and have been holding from 2013? or something like that. Ancient whales or something. So like some of it is probably people who could have mined it on a laptop or something, or maybe bought and literally forgot about it until recently ish or something idk. I was under the assumption it's still a thing. Idk if most of them revealed themselves when it went up to 60 70k? Idk. Like I feel like there are tons of people who didn't cash out because it didn't make them rich, just like bought a small amount or just a few bitcoins when it was cheap or something long ago, and are just waiting till it reaches a mil. Idk. What metric can we use to measure that?