Learn about how Puerto Rico is a tax haven for crypto investors.

Puerto Rico—A Paradise in Many Ways

It’s no wonder that Puerto Rico attracts millions of tourists worldwide who delight in the territory’s vibrant culture and year-round warm weather. Visitors can take their pick from among countless indoor and outdoor adventures within a stone’s throw of San Juan. But even greater treasures are waiting for those who move to Puerto Rico.

The island offers a host of extremely lucrative income tax laws to individuals who have become bona fide residents. As a result, many individuals from the mainland have relocated to Puerto Rico to reduce their taxes immensely. Crypto investors can profit especially well from these tax benefits.

In recent years, many of those who invested in digital currency such as Bitcoin and Ether turned into millionaires almost overnight. But this high profitability of cryptocurrency comes with a downside—taxes.

If you are a crypto investor in the United States, then you are already aware of the steep federal tax rates you have to pay on your capital gains.

Let’s take a look at how moving to Puerto Rico can help you gain a more favorable tax treatment by nearly eliminating your crypto tax liability.

The Difference between Taxes on Cryptocurrency in Puerto Rico and the United States

The Commonwealth of Puerto Rico bears a special relationship to the United States. This Caribbean island’s political status is that of an unincorporated territory of the United States. This means that even though Puerto Rico is regarded as a part of the United States, it is not a state in itself. As a result, the government of Puerto Rico has some freedom to stipulate its tax laws, which are independent of the U.S. federal or state laws of the mainland.

In 2012, Puerto Rico passed Acts 20 and 22—later combined into Act 60—which aimed to improve Puerto Rico’s economy through many highly lucrative tax incentives for resident individuals and Puerto Rican businesses. In particular, the Individual Resident Investor Tax Incentive allows crypto investors to cut down substantially on their capital gains tax compared to federal taxation laws.

Let’s see how.

Capital Gains in the United States

In the United States, the Internal Revenue Service (IRS) treats cryptocurrency and other crypto assets as property for taxation purposes. While possessing crypto is not taxable, selling or using your crypto in a transaction is considered a taxable event.

Capital gains occur when the price of your crypto has increased from the time of purchasing to the time of selling. If the price of your crypto has increased and you still have not sold it, the capital gain is then said to be unrealized. Unrealized gains become realized when you sell the crypto and earn the associated capital gains.

You will incur a capital gain or loss when you sell your crypto. According to the IRS, you owe taxes on any profit you make from selling crypto, i.e. on your capital gains.

Short-Term Capital Gains

If the crypto was held for less than a year, then the kind of gain you realize is a short-term capital gain. Depending on your income tax bracket and filing status, the IRS will tax your short-term capital gains from crypto at a rate of up to 37%.

Long-Term Capital Gains

For crypto held for more than a year, you will have to pay long-term capital gains tax, which is charged at rates ranging from 10% to 20%.

The Net Investment Income Tax

That’s not all. An extra tax known as the Net Investment Income Tax will be charged at a rate of 3.8% if your capital gains exceed a certain threshold amount determined by your filing status.

The U.S. Worldwide Income Tax System

Lastly, if you are a U.S. citizen, then federal income tax laws mandate that you pay taxes to your home country no matter where you reside. So there is no way of avoiding regular income taxes without ending your citizenship—except by moving to a U.S. territory like Puerto Rico.

Capital Gains in Puerto Rico

Capital gains taxes work very differently in Puerto Rico. Due to the Act 60 program, residents of the island enjoy a host of incredible tax benefits, and crypto investors will find that the island is truly a paradise for them.

The Individual Resident Investor Tax Incentive ensures that Act 60 decree holders are exempt from paying any tax on capital gains, both long-term and short-term, due to cryptocurrency and other crypto assets. With a 0% rate for crypto taxes, Puerto Rico offers investors who establish residency here an amazing bargain. This is an unparalleled tax benefit.

How to Qualify for the Decree

The only catch is that you must prove to be eligible to become an Act 60 decree holder before you can enjoy these tax savings. To qualify for the decree, you must first and foremost become a bona fide resident of Puerto Rico.

Other than that, every year, you need to donate $5,000 each to two approved Puerto Rico non-profits and file an annual report to the Department of Economic Development and Commerce to maintain compliance with the decree regulations.

The Puerto Rico government has put all these criteria in place to ensure that the individual investor is truly committed to living in Puerto Rico. The investor enjoys a 0% capital gains tax rate while the Puerto Rican economy benefits from the individual’s investments.

How to Satisfy the Bona Fide Puerto Rican Residency Tests

The IRS has set up the bona fide residency tests to ensure that an individual truly intends to stay in Puerto Rico for a long time before exempting them from U.S. federal tax laws.

For an investor to be free of any capital gains tax due to crypto, they must pass the requirements of each of the following tests. After that, they must file Form 8898 to notify the IRS of the new status.

The Presence Test

The first test measures how long an individual stays in Puerto Rico compared to the mainland. To pass the presence test, an individual must satisfy any of these criteria:

• Be present in Puerto Rico for at least 183 days in the tax year.
• Be present in Puerto Rico for at least 549 days in the three-year period of the current tax year and the two previous tax years, and be in Puerto Rico for at least 60 days in each tax year during that period.
• Do not be present in the United States for more than 90 days during the tax year.
• Do not have more than $3,000 in earned taxable income (defined as pay for personal services performed, such as wages, salaries, or professional fees) in the United States during the tax year and be present in Puerto Rico for more days than in the United States.
• Have no significant connection to the United States during the tax year.

“Being present,” according to the IRS, means being physically present in Puerto Rico during any part of the day.

You should be aware of a few technicalities surrounding this particular test beforehand, such as exceptions due to medical emergencies and natural calamities.

The Tax Home Test

The IRS defines a tax home as an individual’s primary place of employment or post of duty. To pass this test, the individual must prove that they do not have a tax home outside of Puerto Rico. If they do not have an official place of employment, then the individual’s primary location of residence will be considered their tax home.

The Closer Connection Test

The closer connection test gauges an individual’s loyalty to Puerto Rico. It’s a subjective test. The IRS checks the individual’s details and information, which can include but are not limited to the locations of the following:

• Permanent home
• Immediate family
• Personal belongings
• Principal bank
• Workplace
• Jurisdictions of their driver’s license and voting registration

The New “Test” in Act 60

In 2020, changes made to the Act 60 program included a new clause for bona fide residency. This new rule requires the decree holder to purchase a real estate property in Puerto Rico within two years of obtaining the tax exemption decree. This property must also be the individual’s primary residence throughout the decree term.

Exception: The Year of the Move

Passing the bona fide residency tests, especially the tax home test, is only possible if the individual moves to Puerto Rico on January 1. Such a requirement is not realistic. That’s why the IRS has made a special exception for Act 60 decree holders during the year of their move.

Individuals can take advantage of the Act 60 tax benefits if they maintain bona fide residency in Puerto Rico for the last six months of the year. This means that all they need to do to save on taxes on capital gains earned after their move is to relocate to Puerto Rico before July 1.

Capital Gains Must Be Earned as a Bona Fide Resident

It is important to remember that Act 60 tax savings are reserved exclusively for capital gains accrued while the Act 60 decree holder is a bona fide resident of Puerto Rico. On top of that, only gains realized before January 1, 2036, are eligible for the zero tax rate.

Your crypto’s capital gains will be split into two parts. The gains that you incurred while you were still a U.S. resident will still be taxed as usual by the IRS. Only the gains acquired as a Puerto Rican resident will qualify as exemptible under Act 60 regulations.

Strategies to Minimize U.S. Capital Gains Taxes

There are two ways to reduce your pre-move U.S. capital gains tax liability as much as possible. It is up to you to decide which way suits your situation the best.

Option 1

The first option is to sell your crypto assets while you are still a resident of the mainland and buy them back in Puerto Rico immediately after you become an Act 60 decree holder.

This way ensures that your crypto’s unrealized capital gains after becoming a Puerto Rican resident are purely Puerto Rico sourced income and thus free from capital gains taxes.

Whatever pre-move gains you realize after selling crypto while still on the mainland will, of course, be taxed in accordance with U.S. regulations. However, the gains accrued after your move to the island will be absolutely tax free.

It would be a good idea to talk to an expert about the best time to sell your U.S. crypto.

Remember that you have until January 1, 2036, to sell the crypto that you rebought after becoming a bona fide resident of Puerto Rico and still benefit from Act 60 tax savings.

Option 2

In the second scenario, you hold on to your pre-move crypto assets for 10 years after becoming a bona fide resident of Puerto Rico.

You will be taxed at a rate of only 5% on your pre-move gains. This is far lower than the regular rates of 15% or 20% that you would pay if you realized these gains while still on the mainland.

Again, this strategy only works if you realize these gains before January 1, 2036.

Puerto Rico—An Important Crypto Tax Haven for Investors

It should be clear by now that Puerto Rico is the place to be if you are a crypto investor. Relocating to the island means tapping into wonderfully low income taxes, but the return on your investment won’t stop there if you start a new life in the Caribbean. Being a bona fide resident of Puerto Rico also means having ready access to spectacular scenic beauty, a safe and secure environment, and abundant personal and professional opportunities.

There’s much to consider before making your move. Start thinking about the best way to ship your belongings to the island, how you’ll get around once you’re there, and how to handle your mortgage.

Fortunately, our friendly and experienced team members have helped countless others to relocate. They can’t wait to assist you too.

Don’t delay. Get in touch with our expert team at PRelocate to begin your journey to this tropical paradise now.

Disclaimer: Neither PRelocate, LLC, nor any of its affiliates (together “PRelocate”) are law firms, and this is not legal advice. You should use common sense and rely on your own legal counsel for a formal legal opinion on Puerto Rico’s tax incentives, maintaining bona fide residence in Puerto Rico, and any other issues related to taxes or residency in Puerto Rico. PRelocate does not assume any responsibility for the contents of, or the consequences of using, any version of any real estate or other document templates or any spreadsheets found on our website (together, the “Materials”). Before using any Materials, you should consult with legal counsel licensed to practice in the relevant jurisdiction.