[DennisP]

If you bought crypto on a regulated exchange like Coinbase, which does KYC, then it's pretty easy for the government to find out that it was you who funded the address. After that everything's an open book.

Theoretically you could claim that you were paying some other person, but then you'd have to explain what you paid for. And if you ever cash out your crypto to fiat, you'll have a lot more explaining to do.

Privacy technologies would obscure the on-chain transactions but still not help with the basic problem.

[onelastjob]

Yes, exactly this. As long as the fiat on-ramps and off-ramps are KYC'ed everything that happens in between is an open book. The individual can just use cryptocurrency tax reporting software to provide a trade history for their taxes, and if they don't do that then the IRS can easily track all of their transactions since the IRS will know what addresses they are sending to from exchanges. There's no need for every DEX (or other service) along the way to KYC their users.