Bitcoin is perfectly transparent. Privacy relies on the steps you take to protect your identity.
Things you can do to make a tracing harder:
- Use a VPN or multiple VPN.
- Use Proxy or multiple Proxy.
- Use Tor (Multiple Tor instances can lead to loops, better avoid that).
- Take care to not use the same virtual identity twice or more.
- Circulate coins between wallets. (I strongly dis-advice to use third party services for this purpose (like coinlaundry, change systems), you could
get in touch with coins that are involved in stuff you dont like or
don’t want to be associated in any way.)
- Encrypted communication
- Use a anonymous access point (hardly applicable in most places)
- Never mention your real name or send any document with your name on it
Additionally to mention is you own PC security. Get fami8liar with truecrypt or similar container/drive encryption.
To circulate coins you could either setup your own PC/network to have multiple wallets (maybe in virtual environments) where each virtual environment uses an own proxy chain / VPN chain, then you can circulate coins pretty effectively.
You could also/additionally get a VPS (maybe even as SSH / VNC proxy (also maybe through bitcoin) or online wallet anonymously, to increase circulation effective.
When using TOR solely, your connection is exactly as safe as the EXIT NODE.
Anyway, always keep in mind, as long as the blockchain exists your transaction history with all available details will be online.
If you intend to use a proxy to hide your identity be aware that your web identity ie IP is known to the proxy - all traffic is plain text if the content visited is not encrypted. Be also aware that proxies are an unencrypted relay which makes man in the middle attacks by the proxy admin or if compromised by the proxy intruder possible.
Since this is an important topic this page is a community wiki as of now.