Puerto Rico as a Crypto Tax Haven
- Last updated on . Written by Offshore Protection.
The recent boom in digital asset markets, along with the increased pressure from the IRS to tax cryptocurrency gains, has led many new crypto elites from the US to search for viable ways to ease their crypto tax burdens.
Puerto Rico has been an attractive offshore tax haven for US residents due to its proximity, ease of access, and generous tax savings. Puerto Rico is the only ‘offshore’ tax haven that is officially a territory of the United States, which makes it the most accessible way for US citizens to avoid domestic taxation on worldwide income, simply by relocating and becoming tax residents of Puerto Rico.
Puerto Rico has taken an especially friendly stance towards crypto investors and their respective capital gains.
In this article we will outline Puerto Rico’s tax-friendly policies, and explore how they apply to digital assets in particular. We will also discuss some of the many benefits of becoming a Puerto Rico resident for crypto tax savings and more.
Table of Contents:
- Puerto Rico’s Tax Exemptions
- Who Qualifies?
- How Do Puerto Rico’s Tax Laws Apply To Digital Assets?
- Zero Capital Gains Tax On Cryptocurrency
- Zero Income Tax On Cryptocurrency
- Benefits Of Puerto Rico As A Cryptocurrency Tax Haven
- Is It Worth Moving To Puerto Rico?
Puerto Rico’s Tax Exemptions
Puerto Rico’s main tax benefits come in the form of their Tax Incentive Code, “Act 60”. This includes a number of tax exemptions and benefits which were formerly found in Act 20 and Act 22 of the tax codes, but have now been combined under the more comprehensive Act 60.
The major benefits found in Act 60 are those applying to individual investors, which includes zero taxation on all forms of passive investment income, such as capital gains, dividends, and interest.
These features are drawn from Act 22, the Individual Investors Act. Act 60 also includes the major aspects of what was previously Act 20, the Exports Services Act. This includes:
- Corporate taxation of only 2 – 4 % depending on the type of business.
- Personal income tax of only 4% for Bona Fide residents.
- 75% tax exemptions on state property tax and 50% exemptions on municipal taxes.
What is unique about Puerto Rico’s tax benefits for US citizens compared to other tax havens is the fact that it is the only territory that US citizens can exclude from US federal tax.
Under normal circumstances, the US is one of the only nations in the world where citizens have to pay tax on all of their worldwide income, even if they are no longer a US resident.
This makes it significantly more difficult for US citizens to make use of offshore tax havens in an effective manner.
The US tax code, however, allows bona fide Puerto Rican residents to exclude all Puerto Rico–sourced income from US federal tax. This is because Puerto Rico is an official territory of the US, which means that US Puerto Rico residents only need to pay taxes in Puerto Rico itself.
Importantly, this only applies to income sourced within Puerto Rico as well as all capital gains on assets acquired after becoming a bona fide resident of Puerto Rico.
In order to qualify for Puerto Rico’s tax benefits, both business owners and individual investors must:
- Become official bona fide residents of Puerto Rico. Passing the bona fide resident test primarily involves spending at least 183 days of the year in Puerto Rico, as well as meeting other criteria such as the Tax Home Test and Closer Connection Test.
- Open a Puerto Rico bank account.
- Purchase real estate in Puerto Rico within two years of becoming a resident.
- Make a minimum annual donation of USD 10,000 per year a Puerto Rico charity.
How Do Puerto Rico’s Tax Laws Apply to Digital Assets?
Puerto Rico’s tax benefits apply in the same way to capital gains on digital assets, namely cryptocurrencies, as on any other ordinary assets.
In fact, an article published by the Association of International Certified Professional Accountants (AICPA) specifically states that “digital assets based on blockchain technology are eligible” under Puerto Rico’s tax savings incentives. The tax advantages to cryptocurrency investors and traders are two-fold:
Zero Capital Gains Tax on Cryptocurrency
Act 60 stipulates that capital gains realised after becoming a bona fide resident of Puerto Rico are completely tax free. This can result in significant tax savings for cryptocurrency investors considering the recent boom in crypto markets and the fact that the same US investors could face US federal taxes as high as 37 percent on their realised gains.
This also results in much greater simplicity for the average cryptocurrency investor. The calculation of cryptocurrency taxes is notoriously complicated, as any event of trading one cryptocurrency for another is a taxable event.
Thus, being a tax resident of Puerto Rico reduces the complications of having to accurately calculate taxes on cryptocurrency gains.
It is also important to note that the exemption on capital gains tax only applies to those gains that accrue after the taxpayer relocates to Puerto Rico and passes the bona fide residence test.
As such, cryptocurrency investors who move to Puerto Rico to take advantage of these tax savings must still ensure that they calculate and pay their US federal tax obligations on cryptocurrency gains which were realised before they qualified as bona fide residents of Puerto Rico.
Zero Income Tax on Cryptocurrency
Puerto Rico’s tax incentives can also greatly benefit more active cryptocurrency traders who make short-term income off of day-to-day cryptocurrency trading. This can be achieved through Puerto Rico’s negligible corporate and income taxes which apply to business owners.
By establishing a company in Puerto Rico with the correct structure, freelance cryptocurrency traders can enjoy significantly lower tax rates on the income they earn that is also exempt from US federal tax.
Furthermore, investors can use the additional layer of a corporate structure through which to invest in cryptocurrency in Puerto Rico, and withdraw profits through the form of tax-free dividends.
Benefits of Puerto Rico as a Cryptocurrency Tax Haven
While most cryptocurrency investors were initially drawn to Puerto Rico’s shores for purely practical tax saving reasons, the benefits now extend far beyond these.
Over the years, Puerto Rico has become a hub for cryptocurrency enthusiasts who now enjoy a sense of community on the island, many networking opportunities and social events, and a quality lifestyle along with other wealthy cryptocurrency elite. Other benefits of migrating to Puerto Rico as a cryptocurrency investor include:
- A high standard of living with excellent weather and climate, sunny beaches, top-class amenities and a buzzing social life.
- Access to many exciting financial opportunities outside of only cryptocurrency including Puerto Rico’s booming real estate market and entrepreneurial landscape.
- Ease of access and proximity to the United States make it one of the simplest jurisdictions to relocate to. It also makes it easy to visit family back in the United States. As Puerto Rico is an official US territory, US citizens do not require a visa or residency permit to relocate to the island.
Is It Worth Moving to Puerto Rico?
Puerto Rico is undoubtedly one of the most accessible and effective tax haven jurisdictions for US citizens. Many wealthy investors have made use of Puerto Rico’s generous tax incentives to ease their obligations on traditional income and capital gains alike.
Corporations have established themselves in Puerto Rico to take advantage of the low corporate tax rates and business-friendly environment.
With the recent boom in cryptocurrency markets and the subsequent newfound wealth that has arisen out of it, it is no surprise that these burgeoning crypto elite have chosen Puerto Rico as their preferred base.
While there may be many other places and methods to reduce your tax burden on cryptocurrency gains, opting to relocate to Puerto Rico is certainly among the simplest and most fulfilling routes to take.