Crypto and PR Act 60 - Is it a Zero Capital Gains? Not Quite

Crypto and PR Act 60 – Is it a Zero Capital Gains? Not Quite

Crypto and PR Act 60: Is it a Zero Capital Gains? 

Crypto and PR Act 60: Is it a Zero Capital Gains: So, your cryptocurrency skyrocketed in 2020/2021. And, while the price has dropped in 2021 — for many US Taxpayers who purchased crypto early in the game, they are still due a huge gain when (if) they decide to cash out. As a result, some tax professionals are falsely touting to their clients that Taxpayers can avoid these US taxes altogether under PR Act 60 — but that is not the case. As a result, the PR Act 60 Incentives Code program has become ripe to be peddled as false promotion for tax-free gains — and who can really benefit from it. PR Act 60 does not magically allow you to reduce your capital gains to 5% or zero on previously acquired crypto by simply heading over to Puerto Rico with previously acquired crypto in-hand — and qualifying for PR Incentives Code Act 60. Moreover, qualifying for PR Incentives Code Act 60 has become much more difficult and costly. The program not only requires a Taxpayer to reside in Puerto Rico — but they must also purchase a property in Puerto Rico — and invest into Puerto Rico as well.  Let’s review the basics of how Capital Gains are Treated under Incentives Code 60 (Previously Acts 20/22).

US Worldwide Income and Puerto Rico

Individuals (US Persons) are subject to US Tax on their worldwide Income. So, if a US Person relocates to PR under Act 60, they are are still subject to US Tax on their worldwide income (US income and Foreign Income). The idea is that certain benefits are afforded to the US Person under Puerto Rico Law with PR sourced income. Thus, for gains and other income sourced outside of Puerto Rico, the US still gets to tax the income that is sourced in the US and outside of the US — under the worldwide income and taxation rules.

Capital Gains Code 60 Does Include Crypto?

Yes. 

As provided under Act 60:

      • “Recognizing a recent and emerging industry worldwide, commodities, coins, and any digital assets based on blockchain technology shall be eligible for the incentive applicable to the capital gains of Resident Individual Investors (former Act No. 22).”

Act 60 Crypto Gains Has Limited Impact on Previously Owned Assets 

The PR Incentives Code 60 limits the ability to benefit from Capital Gains derived from assets held before becoming a resident of PR.

As further provided under Act 60:

Capital Gain

(a) Appreciation Before Becoming a Resident Individual of Puerto Rico.

      • The portion of the net long-term capital gain generated by a Resident Individual Investor attributable to any appreciation of the Securities or other Assets owned by such Resident Individual Investor before becoming a Resident Individual of Puerto Rico, which appreciation is recognized ten (10) years after becoming a Resident Individual of Puerto Rico and before January 1, 2036, shall be subject to a five percent (5%)- tax, in lieu of any other tax imposed under the Puerto Rico Internal Revenue Code and shall not be subject to the alternate basic tax provided in Subsection A of the Puerto Rico Internal Revenue Code.

      • If such appreciation is recognized at any other time, the net capital gain with respect to said Securities or other Assets shall be subject to income taxes in accordance with the tax treatment provided by the Puerto Rico Internal Revenue Code.

      • The amount of the net long-term capital gain shall be limited to the portion of the gain related to the appreciation of the Securities or other Assets while the Resident Individual Investor resided outside of Puerto Rico. For taxable years after December 31, 2016, said capital gain shall be considered income from sources outside of Puerto Rico for purposes of the income tax provided in the Puerto Rico Internal Revenue Code.

PR Incentives act 60 & Capital Gain on Prior Assets

Who tends to benefit most from the PR Act 60 Incentives Code Program?

Common Example: A US Person moves to Puerto Rico, qualifies for the act, creates a business in PR — with PR sourced income — and receives a bulk of their income as dividends from this company. For these people, it can be a great tax savings. On the other hand, a US Person just relocating to Puerto Rico under Act 60 with millions in unrecognized crypto gains, hoping to escape the clutches of the US tax system, because some self-proclaimed “tax-expert attorney” has sold them on the hopes of zero capital gains on all cryptocurrency gains…not so much.

It is important to note that the Puerto Rico Act 60 (previously Acts 20/22) is not the same as expatriation — because with PR Act 60, you are still a US Person. Moreover, what many US Taxpayers are not told — until it is too late — is that the program requires a significant residence mandate — and the US person is still a US Person and taxed on their worldwide income (absent certain PR sourced income). Moreover, to combat potential tax evasion, the US Government has significantly increased enforcement —  and in 2021, it was identified as Key Enforcement Priority by the IRS.

Qualifying Taxpayers Must Still Wait 10-Years for Prior Assets

Taxpayers who own the assets before moving to Puerto Rico and qualifying for Act 60 must wait 10 years before they have an opportunity to sell the assets and only be taxed by a small percentage by Puerto Rico instead of the progressive tax rate. But — the United States still gets to tax the US and foreign sourced income (and most crypto income for US person is US sourced)

Gain Acquired After Relocating to PR

Taxpayers can argue that the gain on previously acquired assets that occur after relocating to PR under the Act would not be taxable under the Act, but if the assets are US or worldwide (non-PR) assets, then the gain would still be subject to US Tax.

PR Act 60 Crypto Gains Do Not Benefit Everyone

When a person is a US person and moves to Puerto Rico, the benefits are limited.  But, when a Taxpayer relocates to Puerto Rico under the incentives code and then acquires Puerto Rico sourced assets, they can qualify for preferential tax treatment for Puerto Rico sourced income. Thus, it is important Taxpayers have a firm understanding of these rules before taking the leap and relocating their life to Puerto Rico under PR Act 60 Incentives Code.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in IRS offshore voluntary disclosure and tax amnesty.

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