Yes, the government (and anyone else) can track Bitcoin and Bitcoin transactions. All transactions are permanently stored in a public ledger, available to anyone. All the government needs to do is link it to your wallet or transaction. Bitcoin can also be taxable if it is considered income when someone receives a salary in BTC or receives Bitcoin for providing goods or services.
Events may be subject to taxes such as capital gains when Bitcoin is sold for cash, when BTC is converted into another cryptocurrency, or when Bitcoin is spent to purchase goods or services. In addition, the history of Bitcoin transactions is permanently stored on the Bitcoin blockchain, which means that it is not difficult to observe BTC transactions. Therefore, BTC transactions do not always remain 100% anonymous and the government can track Bitcoin ownership as long as (a series of) Bitcoin transactions can be linked to a person's identity. Anyone can take a look at the history of all these Bitcoin transactions.
Every transaction in Bitcoin's trading history is in an open ledger that can be tracked.