By exploring the features of your BitTorrent client, such as uTorrent, you can see how easy it is to identify who is sharing the same torrent file. As you can see in the following screenshot, each user's IP is visible. It is very simple to identify these users. Each IP is linked to a person, who has a contract with an Internet Service Provider.
How does the tracking process work?
It's simple, every torrent file you download is connected to a tracker. This tracker stores information related to the torrent file, such as the IP address of each user (peer) that has this file. It also stores which parts of that file each peer owns.
The tracker “shows” the BitTorrent software what are the peers that have the complete file, which ones have the parts you need, and which ones need the parts you have. Each torrent file is divided into many parts. The job of this tracker is to show the torrent client “who has what“. That's why it's called file sharing: You send some parts that others do not have, and get the parts you still don't have.
All these trackers are stored in a central server. And the problem is that this server is not encrypted. Without protection, your IP is showing in the tracker as one of the peers downloading or uploading the file. Any entity that wants to see your activity will do it easily, they just have to monitor the tracker. That's why it's very important to download torrents without having your IP address in those trackers.
Even users can see the IP and country of the people downloading and uploading the same file. As you can imagine, if it's easy for users, it's a basic procedure for entities trying to follow your activity. After getting your IP from the tracker, they only have to associate it with your physical address. And just like that, they have your name.
How to avoid your IP from being tracked?
To avoid being traced and exposed, a VPN that is suitable for file-sharing is probably the best solution. You will be able to connect to a server in another country and change your IP. The tracker will identify the country and IP of your VPN server, not your real one. The same would happen to entities trying to trace you and your activity. They would see the IP from the VPN server, coming from another country.
There are some other solutions out there, but none of them is as complete and secure as a VPN. Apart from that IP exchange, the VPN encrypts your Internet connection. It prevents anyone from having a peek at what you are doing or downloading.