Crypto Taxes in Puerto Rico

7 minute read

Most people are drawn to Puerto Rico for its gorgeous beaches and year-round summer weather. But, there’s an even bigger draw for those who invest in cryptocurrency, and that’s the massive tax savings that crypto investors can bask in.

Before you pack your bags and move to paradise, here’s what you need to know about tax planning for cryptocurrency in Puerto Rico.

Why Are There Differences Between the Taxes on Cryptocurrency in Puerto Rico and the Continental United States?

While Puerto Rico is part of the United States and Puerto Ricans are US citizens, the territory remains unincorporated. As it is a territory and not a state, residents do not have voting representation in congress and do not vote for president or vice-president in the US elections. This means their tax laws can differ from those of the United States.

How Does the Continental US Tax Crypto Capital Gains?

The US is beginning to crack down on cryptocurrency. According to the IRS, any profit earned on crypto is considered a capital gain. If the crypto was held for a year or less, then it’s regarded as a short-term gain. Short-term capital gains are taxed at a rate of up to 37% and are based on modified adjusted gross income.

Long-term capital gains are owed on any crypto that has been held for over a year or more. Long-term capital gains are taxed at a rate of anywhere up to 20% and are based on income tax bracket and marital status.

However, there is also an additional tax. This tax is known as the Net Investment Income Tax and claims another 3.8% of capital gains if your income from the net investment reaches a certain threshold which is based on your filing status.

How are Capital Gains Affected by Puerto Rico Cryptocurrency Tax?

In Puerto Rico, you can hang on to more of your capital gains and enjoy a more lavish lifestyle.

ACT 60 Puerto Rico

ACT 60, originally known as ACT 22, provides the individual resident investor a tax exemption if specific criteria are met. This tax incentive offers a tax rate of 0% on capital gains if you qualify as a bona fide resident. This means that there is no tax on capital gains earned from crypto, interest, or dividends.

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What are Considered Crypto Taxes in Puerto Rico?

Under ACT 60, the tax savings only applies to capital gains earned while a bona fide resident in the US territory. Any gains earned while considered a resident of the US is subject to the US capital gains tax. Therefore, any pre-move gains made in the US are still subject to US taxes. So, this concept can be a little tricky when moving mid-year.

What Does it Take to Qualify as a Bonafide Resident in Puerto Rico?

To utilize this tax incentive, you have to first prove that you are a bonafide resident of Puerto Rico. To qualify for this type of residency, you must meet three residency tests.

Presence Test

This test takes into account how much time is spent in Puerto Rico as compared to the United States. To satisfy this test, an individual must spend at least 183 days in a given year in the US territory, spend less than 90 days in the US, or earn under $3,000 of taxable income in the US in addition to spending more time in Puerto Rico than in the United States. A ‘presence day’ is considered any day or time physically present in Puerto Rico.

Tax Home Test

An individual must declare their tax home for the tax year as being in Puerto Rico. A tax home is considered the location of the primary workplace or the residential address if there is no workplace. Therefore, an individual must work primarily or reside in Puerto Rico.

Closer Connection

The Closer Connection Test is satisfied by having more ties in Puerto Rico than in the US. Puerto Rico must also be the intended long-term residence.

Buying property in Puerto Rico is also mandatory and must be purchased within 2 years of acquiring the ACT 60 decree. This property must be maintained as the primary residence.

You have to prove to be a bona fide resident, but there is also another requirement. You must make two $5,000 donations to a select group of nonprofits in Puerto Rico each year and file an annual report.

Are There any Exceptions to the Bonafide Residence Test?

It’s challenging to meet all of the criteria the year of the move, so the IRS does make special allowances for this transitional year. As long as the bona fide residence is maintained for the last six months of the year starting July 1, the tax benefit can still be applied.

Puerto Rico Crypto Tax Haven: Should I Move to Save Money on My Taxes?

The US is one of the few countries where taxes are based on citizenship. Most countries base their taxes on residency. This means that US citizens have to pay taxes in the US regardless if they live and work abroad.

Since Puerto Rico is a US territory and not a state, it isn’t subject to the tax laws and rates charged by the US. This US territory has even lowered its corporate tax rate to 4%, one of the lowest in the world. This has attracted new businesses and foreign investors to the area, which is great for their economy.

So, should you move to this crypto tax haven? After all, relocating and changing everything about your life as you know it is no small task. The answer boils down to how you would respond to 2 questions. Would you live in Puerto Rico full-time, and would you be working there full-time? If the answer is yes, you may want to pack your bags and get there as fast as possible.

Getting the Most Out of Cryptocurrency

If you are looking to make the most out of your capital gains, where you live can have a significant impact. However, good tax planners use a variety of strategies each year to save money. Tools such as Corvee tax planning software help taxpayers quickly find the strategies available to them. Request a demo today.

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