Are Puerto Rico Crypto Gains Tax-Free by Act 60 (True or False)

Is Puerto Rico the Crypto Tax Haven You Imagine?

Is Puerto Rico the Crypto Tax Haven You Imagine?

Some less experienced attorneys who claim to be experts in matters involving cryptocurrency and other virtual currencies falsely induce US taxpayers into believing that by relocating to Puerto Rico they can magically eliminate most, if not all of their US tax liability and avoid gains on cryptocurrency earnings. They post colorful marketing materials with magical examples that make you want to jump on the first flight out to PR – hoping you take the bait. But as your grandma taught you when you were young, if it sounds too good to be true then it probably is too good to be true. If this was really that easy, then anyone would just hightail it over to Puerto Rico, soak in the sun for a bit, reduce or eliminate their US tax liability on cryptocurrency gains — and then mosey back to the mainland with their pockets full of untaxed crypto gains. Unfortunately, this is not the case and some taxpayers, unfortunately, do not realize it until they have been led astray. Let’s take a look at six (6) important facts about claiming Puerto Rico as your crypto tax haven.

Cryptocurrency is Not Taxed at All

False.

There is a common misconception that once a person moves to Puerto Rico all their crypto income is tax-free, but that is false. In a common situation, a taxpayer relocated to Puerto Rico after having accumulated a significant amount of gain for their cryptocurrency. They want to sell the cryptocurrency, but of course, do not want to become subject to US tax. Assuming in the first place that they even qualify for Act 60, it does not automatically eliminate already accumulated cryptocurrency gains (or other gains). You are still going to pay capital gains on the amount of gain that has not yet been recognized. Therefore, unless your goal is to relocate to Puerto Rico under Act 60 and begin making large investments in cryptocurrency, Act 60 is probably not going to benefit you the way it is being presented.

All Income is Taxed at Under 4%

False.

Under act 60, only certain Puerto Rico companies may qualify for a 4% tax. That does not mean that if you relocate to Puerto Rico, all your income is suddenly only taxed at 4%. In order to qualify under PR Act 60, the type of business is very limited, and the taxpayer has to be very careful to sidestep engaging with the United States directly — as well as developing any types of contacts with the US that might get the bona fide residence of the individual in Puerto Rico.

Foreign Income is Not Taxable

False.

One very important aspect of Act 60 for US taxpayers is that if they relocate to Puerto Rico and qualify under Act 60, it does not eliminate US tax on their worldwide income. If they still have US income, then they are taxed on that income. Likewise, if they have foreign income in other countries as well — that income is still taxable. The tax minimization applies specifically to Puerto Rico-sourced income; for taxpayers who have significant assets across the globe, overseas income streams, and businesses abroad – PR Act 60 is probably not for you either.

You Can Visit the US as much as you Want

False.

Unfortunately, to qualify for residence under Act 60 (or Puerto Rico in general), there are very specific requirements. For example, the person must reside in Puerto Rico for at least 183 days. While there may be ways to (maybe) circumvent this rule, it is not worth the risk. In addition, Puerto Rico must be the primary place where you work and live, so just visiting during the summer and winter breaks is not going to fly. Moreover, the taxpayer also must pass the closer connection test and be able to show that they have a closer connection with Puerto Rico than for example the US state they originally relocated from. Finally, unlike prior versions of the Act (Acts 20 and 220) you have to purchase a Puerto Rico property within two years and it must be your primary residence.

Your Chance of IRS Audit Goes Up

True.

The United States government very much dislikes PR Act 60 because they see it as a type of scheme in which a US citizen is seeking to avoid US tax. Various members of Congress have made it known that they intend to pursue taxpayers who relocate to Puerto Rico under Act 60 to artificially reduce their tax liability. In fact, IRS developed an international compliance program aimed directly at Taxpayers who are relocating to Puerto Rico under Act 60 (previously Acts 20/22).

As provided by the IRS:

• • • This campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 22, “Act to Promote the Relocation of Individual Investors to Puerto Rico”, without meeting the requirements of IRC Section 937, Residence and Source Rules Involving Possessions. As a result, these individuals may be excluding income subject to US tax on a filed US income tax return or failing to file and report income subject to US tax. 

    • This campaign will also address those individuals who have met the requirements of IRC Section 937 but may be erroneously reporting US source income as Puerto Rico source income in order to avoid US taxation. The objective of this campaign is to address noncompliance in this area through a variety of treatment streams including examinations, outreach and soft letters.

The IRS Can Claw Back Prior Year Income Tax Liabilities

True.

Taxpayers also must be very careful about the fact that if they are audited and the IRS determines that they did not meet the requirements of Act 60 and/or should have still been taxed by the US government on their income, it could result in significant tax liability, fines, and penalties. In other words, if the IRS disagrees with your position that you should have been taxed by the US government on certain income — they can also claw back the income and go after your assets and income streams.

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