Puerto Rico’s Crypto Tax Haven Dreams are on the Rocks

Like the IRS in the mainland US, the Puerto Rican tax authority hasn’t issued definite guidance on crypto.

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key takeaways

  • Puerto Rico has its own tax authority that’s separate from the IRS, and preferential tax rates for those that have migrated from the mainland US has attracted many digital nomads and their wealth
  • Some might advertise the island as a cryptocurrency paradise. The guidance on crypto taxation, however, isn’t that clear

Location independent workers — digital nomads — often look to Asia as a place to escape the harsh weather of parts of the continental United States and the tax burdens of Uncle Sam. But, with the passage of two tax bills in 2012, the semi-autonomous territory of Puerto Rico has made a play for these monied migrants with promises of single-digit tax rates. 

Under Act 22 of its local tax code, Puerto Rico offers full exemption from all local taxes on passive income to newcomers. Act 20, provides a 4% corporate tax rate and exemptions on dividends.

With the popularity of remote work, particularly in the digital assets industry, many have moved over to the island in order to get the dual benefits of living in the US while paying tax rates competitive with Asia. 

There’s just one problem. Like the IRS in the mainland US, the Puerto Rican tax authority hasn’t issued definite guidance on crypto. Capital gains, as San Juan-based tax accountant and lawyer Luis Rodriguez explained, are taxed at a preferential rate of 4%, however, the tax authorities haven’t issued a formal position on how this relates to crypto. 

“Up to this point, there hasn’t been a formal expression by the Puerto Rican treasury department about the treatment of crypto,” Rodriguez said during panel on taxation at the Consensus virtual event.

One interpretation of the code would treat crypto as an asset, Rodriguez explained, which is along the lines of the IRS’ guidance issued in 2014. It would be treated with a capital gain of 15%. This is lower than the normal tax rate Americans are used to, but still significantly higher than 4%. 

However, the Treasury Department said last week that a crypto crackdown is coming as part of the Biden administration’s attempted overhaul of the tax system.

A report from the department specifically mentioned cryptocurrency and giving the IRS new tools to fight crypto tax evasion. This might mean that cryptocurrency is taxed as a separate asset class with a new taxonomy, or it might just mean that the tax authorities will be given additional firepower in their fight against tax cheats. 

Regardless of the outcome, Puerto Rico will no doubt be following the news closely and aligning its tax code accordingly. It could be that this bucolic island which flies the US flag becomes a crypto paradise lost.

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