How U.S. Crypto Investors Can Reduce IRS Taxes By Moving to Puerto Rico
FAS CPA & Consultants
Crypto and the IRS approach to taxing
In the US, cryptocurrency is treated as property. Gains are subject to capital gain taxes. In the short term, rates of between 10-37 % apply, and in the long term, rates are between zero and 20%. High net worth individuals have to pay an additional 3.8% Net Investment Income Tax (NIIT) over and above your capital gain tax rate.
Uniquely, the US taxes its citizen also on their worldwide income even if they live and work abroad. As a US territory, Puerto Rico is exempted from this rule by Act 60-2019, previously known as Act 22.
There has been a great deal of hype about the IRS crackdown on cryptocurrency. No one should ignore it, and everyone should educate and prepare themselves for what lies ahead. This is especially true for those who did not report their past earnings correctly. While you might be dreaming about making it big whenever you finally cash in your crypto, you might be worried about the IRS coming for you; and like most, you have to save money on your tax bills.
The best time to move to Puerto Rico is before the value of your cryptos goes up. You want to grow your gains when you are in Puerto Rico. The gains in your crypto up until the date you enter Puerto Rico will still be taxed by the US when you dispose of your crypto. If you sell your crypto, which you bought in the US after you become a Puerto Rican citizen, a part of your gain will be taxable in the US, and the rest will be taxed in Puerto Rico.
The date you arrive in Puerto Rico will be the date you became a bona fide resident. After that, your gains will be deemed Puerto Rican.
Understanding the Puerto Rican Opportunity
When US citizen relocates to Puerto Rico, they can reduce their corporate tax to four percent and their income tax on capital gains to zero percent. And once they cash out of their crypto holdings, they reap the benefits of Puerto Rico’s tax-free benefits. When the next bull runs hits for those who live in Puerto Rico, this can mean unimagined riches. But to get there will require careful preparation and essential lifestyle changes.
In terms of Chapter Two of the Puerto Rico Incentives Code (Act 60-2019) , moving to Puerto Rico will allow you to pay no federal taxes after that. It became law on July 1, 2019, effective on January 1, 2020. This so-called Incentive Code combines many of Puerto Rico’s incentive laws into a single, more transparent, and efficient process.
The move to Puerto Rico
No one that lived in Puerto Rico during the previous 15-years can qualify for the tax program. Both you and your business have to move to Puerto Rico literally — it has to become your real tax home.
The Tax Status of Puerto Rico is unique. Despite being a US territory, it is nevertheless recognized as a “foreign country” regarding US Federal Income Tax. As a result, the individual tax rates that apply are alluring to US investors and crypto traders.
Once you become a bona fide resident and your business establishes its tax jurisdiction in Puerto Rico, all your future capital gains on assets, including stocks and bonds, commodities, currencies, and digital assets, including blockchain technology, become tax-free.
⇒ A 100% tax exemption on interest and dividends AFTER becoming a Puerto Rico resident, up until December 31, 2035.
⇒ A 100% tax exemption from Puerto Rico income tax on capital gains accrued after establishing residency.
⇒ A 100% tax exemption on gains from the sale of property that had been acquired after becoming a bona fide resident of Puerto Rico that is sold before January 1, 2036.
⇒ Investment income earned before BECOMING A Puerto Rico resident will be taxed at 10% if it is realized within ten years after establishing residency.
⇒ Investment income earned before BECOMING A Puerto Rico resident will be taxed at 5% if it is realized after ten years after establishing residency and before December 31, 2035.
⇒ Capital gain appreciation on investments that occur after residency allocate to Puerto Rico.
Special rules for the gain from the sale of securities acquired before establishing residency in Puerto Rico.
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Incentives and crypto
You do not have to be a crypto billionaire to benefit from the tax exemptions offered. The early bird catches the worm, and the Puerto Rican incentives are no exception when it comes to crypto. You have to become a bona fide Puerto Rico resident to reap the benefits. You have to understand the rules and comply with them. Your connection to Puerto Rico must become closer than to the United States.
⇒ You have to reside in Puerto Rico for more than 183 days per year.
⇒ Applications have to be made to the tax authorities in Puerto Rico.
⇒ Your Act 22 application must include a filing fee of $750.00.
Bona Fide Residency
In terms of IRS §937, a bona fide resident of Puerto Rico:
⇒ Is an individual that qualifies as a bona fide resident for the entire taxable year for the US IRC’s purposes and income must constitute Puerto Rico source income under US IRC.
⇒ Must be physically present and living in Puerto Rico for at least 183 days during the first taxable year.
⇒ Cannot have a tax home outside Puerto Rico during the taxable year.
⇒ Pay an annual charitable contribution for a non-profit entity of $10,000.
⇒ Must purchase property in Puerto Rico within two years after obtaining the decree under the new Act 60-2019.
⇒ This property must be your primary residence throughout the validity of the decree.
⇒ Must hold exclusive and complete ownership of the residential property during the decree’s duration, but joint ownership with a spouse qualifies too.
⇒ The property cannot be let to third parties.
The final determination of whether you are a bona fide resident of Puerto Rico is made based on the rules issued as regulations under Section 973(a) of the US IRC.
Move away completely. Avoid any close association with the US. Close bank accounts, sell your home and personal property and cancel memberships in clubs and organizations.
A closer connections to Puerto Rico
This is determined by where you:
⇒ Hold your bank account.
⇒ Have a driver’s license.
⇒ Documents are located.
⇒ Your high school diploma is stored.
⇒ Your college degree is stored.
⇒ Your spouse and children live.
⇒ Your mail goes.
⇒ Your investments are held.
⇒ Your property is located.
For a closer connection to Puerto Rico, the answer to none of these questions should be the US.
Check Our Service: Tax Planning For U.S. Crypto Investors
Time-based factors
Becoming a bona fide Puerto Rican is not enough to release the tax benefits. The appreciated crypto assets that arrive with you are still subject to US taxes. The zero-tax rate refers only to crypto-assets purchased as a Puerto Rico resident.
Tax bill mitigation
Before moving, sell your crypto and repurchase it as soon as you become a bona fide Puerto Rican. Appreciation after this transaction is tax-free in Puerto Rico. Of course, when you sell, you become liable for a capital gains tax on all pre-move gains.
Keep your crypto after moving to Puerto Rico. If you hold on for ten years after becoming a resident (before January 1, 2036), your pre-move gains are subject only to a 5% tax rate. It remains a better deal than paying the 20% the IRS would demand.
Law 40-2020
The law substantially increased the up-front costs for those who wish to move to the island.
⇒ Filing fee – $750.
⇒ Special Fund Fee – $5,000 if the filing application is approved.
⇒ Obligatory annual contribution – $10,000.
⇒ Annual fee of $5,000.
⇒ Companies with revenue of more than $3,000,000 per year must appoint a full-time employee in Puerto Rico – but you can nominate yourself for this position.
Protection from the IRS in Puerto Rico and on the US mainland
None of the above will immunize you against US tax audits. You still have to file an income tax return with the US as long as you remain a US citizen, whether you move to Puerto Rico or not — as long as you earn more than $12,000 per annum before subtracting your Puerto Rican income.
Moving to Puerto Rico for these tax benefits is complicated. You have to cut all your personal and business ties with the US. You have to move to an island with a foreign language and cultural barriers. The island will impose high administrative and professional costs, and you will live in an often unstable economic and political environment.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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