How Crypto Investors Can Save Big on Taxes in Puerto Rico
- Posted: May 3, 2021
- Posted by: Travis Lynk
- Last Reviewed: August 25, 2021
The boom of Bitcoin throughout the 2010s has shown how lucrative it can be to invest in crypto. Early adopters in particular have become self-made millionaires through their investments in the digital currency, and although the price tends to fluctuate wildly, a single Bitcoin is consistently worth thousands of U.S. dollars. The downside to being a crypto trader is the taxes you have to pay on your capital gains. But if you’re a U.S. crypto trader, there’s a way to save big on your capital gains taxes—moving to Puerto Rico under the Act 60 Individual Resident Investor tax incentive.
Capital Gains Tax in the US
Before jumping on the next flight to Puerto Rico, crypto investors should have a solid grasp on how the US taxes cryptocurrency capital gains. Any gains earned on crypto assets are considered capital gains by the Internal Revenue Service (IRS) and are taxed accordingly. In general, short-term capital gains work out to a 10–37% tax rate, while long-term gains are taxed at 0%, 15%, or 20%, depending on your income tax bracket and marital status. An additional net investment income tax (NIIT) of 3.8% also applies to capital gains if your net investment income is above a certain threshold—$200,000 for single filers, $250,000 for those married filing jointly, and $125,000 for those married filing separately.
One more important consideration about U.S. taxes is that, as long as you’re a U.S. citizen or resident, you owe taxes to the United States regardless of where you live and work. Essentially, there’s no way to escape your U.S. tax burden, other than renouncing your U.S. citizenship. Puerto Rico and the other U.S. territories are the sole exceptions, as they are U.S. territories but not states. This makes Puerto Rico the ideal tax haven for crypto investors looking to keep more of their own money.
Puerto Rico’s Act 60 Individual Resident Investor
Since 2012, thousands of U.S. investors, crypto and otherwise, have settled on the beautiful Caribbean island of Puerto Rico to soak up the sun while enjoying massive tax savings. Originally known as Act 22, the tax incentive was updated in 2019, when it became known as the Act 60 Individual Resident Investor tax exemption. The incentive offers a 0% tax rate on capital gains earned as a bona fide resident of Puerto Rico. In other words, you can cash out your capital gains on dividends, interest, and crypto assets, whether long or short term, without paying any taxes.
There are, however, certain conditions that an Act 60 Individual Resident Investor decree holder must satisfy to be eligible for the generous tax savings. Most importantly, they must establish themselves as a bona fide resident of Puerto Rico, which essentially means they must truly commit to a life on the island. Act 60 Individual Resident Investor decree holders also need to make two donations of $5,000 to approved Puerto Rico nonprofits each year and file an annual report to maintain compliance with the decree regulations.
How to Satisfy the Bona Fide Puerto Rican Residency Tests
To be eligible for the capital gains tax exemption offered by the Act 60 Individual Resident Investor tax decree, a crypto investor must maintain bona fide Puerto Rican residency throughout the entire tax year. Bona fide residency is established when a decree holder satisfies three residency tests: the presence test, the tax home test, and the closer connection test.
The presence test examines how much time a decree holder spends in Puerto Rico compared to the mainland United States. The most basic requirement is that a decree holder spend at least 183 days of the tax year in Puerto Rico, but this test can also be satisfied by spending fewer than 90 days in the United States or by earning less than $3,000 in taxable income in the United States and spending more time in Puerto Rico than in the US. A “presence day” in Puerto Rico is counted as any day during which the decree holder is physically present, even if just momentarily, in Puerto Rico, and exceptions may be made for medical travel or natural disasters.
Tax Home Test
The tax home test simply stipulates that a decree holder must maintain their tax home in Puerto Rico for the duration of the tax year. An Act 60 Individual Resident Investor decree holder’s tax home is considered their primary workplace, and if they do not have a primary workplace, their residential address is considered their tax home.
Closer Connection Test
The closer connection test is the most subjective of the three bona fide Puerto Rican residency tests and can be satisfied in a number of ways. Essentially, the IRS wants to ensure that a decree holder holds more significant ties to Puerto Rico than the mainland United States and that they intend to live in Puerto Rico long term. In most cases, this means moving your family and belongings to Puerto Rico, obtaining a Puerto Rican driver’s license, opening Puerto Rican bank accounts, registering to vote in Puerto Rico, and other actions that indicate a commitment to the Caribbean island territory.
Buying property in Puerto Rico is another good way to contribute to the closer connection test—and, in fact, it’s mandatory. Act 60 Individual Resident Investor decree holders have to purchase Puerto Rican property within two years of obtaining their decree. They must maintain the property as their primary residence for the duration of their degree.
The Year of the Move
Unless a crypto investor moves to Puerto Rico on January 1, it’s clear that satisfying certain bona fide residency tests, such as the tax home test, is impossible on the year of the move. Recognizing this, the IRS offers special, reduced residency criteria for Act 60 decree holders on the year of their move—as long as they maintain bona fide Puerto Rican residency for the last six months of the year, they can still reap the tax benefits. So, if a crypto investor moves to Puerto Rico before July 1, they can still save on taxes on any crypto gains earned after their move.
Capital Gains Must Be Earned as a Bona Fide Resident
A crypto investor can’t simply move to Puerto Rico and cash out the years of capital gains they’ve earned on their investments while living in the United States—capital gains eligible for the Act 60 tax savings are exclusively those earned while the decree holder is a bona fide resident of Puerto Rico. Cashing out gains earned as a U.S. resident will subject an investor to regular U.S. capital gains taxes. Moving to Puerto Rico with unrealized gains and realizing them after spending some time as a Puerto Rico resident can get complicated, as only a portion of the realized gains will qualify for the Act 60 tax exemption. It should also be noted that gains must be realized before January 1, 2036, to enjoy the 0% capital gains tax rate.
Strategies to Avoid U.S. Capital Gains Taxes
If you’re moving to Puerto Rico under the Act 60 Individual Resident Investor tax incentive with unrealized crypto gains, you have two options to avoid paying U.S. capital gains taxes when you realize your gains. The first is selling your crypto assets and then immediately buying them back. Since you bought the assets as a bona fide Puerto Rican resident, they will be indisputably considered Puerto Rico–sourced, and you’ll save on all related capital gains taxes as long as you cash out before January 1, 2036. The downside, of course, is that you’ll still have to pay regular U.S. capital gains taxes on the gains you realized upon selling.
The other option is to continue holding your crypto assets until you’ve been a Puerto Rican resident for at least 10 years. Once you hit the 10-year mark, the gains earned before you moved to Puerto Rico will be taxed at a mere 5%, which is significantly lower than the 15% or 20% you might have otherwise owed the IRS. The condition is that you must sell your crypto assets and realize the gains before January 1, 2036.
Puerto Rico—An Important Tax Haven for Crypto Investors
Relocating your whole life to Puerto Rico can be quite an ordeal, but the island offers a rich lifestyle with gorgeous beaches and year-round summer weather. Puerto Ricans are friendly, and Puerto Rican culture is vibrant and exciting—Act 60 decree holders can enjoy scrumptious Puerto Rican cuisine and partake in various cultural activities. Of course, the most enticing part of the move is the massive tax savings crypto investors can enjoy. No capital gains taxes on crypto gains is the dream of any crypto investor.
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.
Read MoreMay 5, 2022
Read MoreJanuary 21, 2022