Should You Move to Puerto Rico to Avoid Cryptocurrency Tax Liability?

Among the recent wave of stories published about Facebook whistleblower Frances Haugen, one story published in the New York Times has gotten a lot of attention for reasons not related to Haugen’s formal testimony. Haugen told the New York Times that she “did buy crypto at the right time,” and this, in part, prompted her to move to Puerto Rico with her “crypto friends” earlier this year.

This seems to have stirred a lot of interest in Puerto Rico’s tax laws, which the U.S. territory amended to attract wealthy investors, within the cryptocurrency community. As Boston international tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, while Puerto Rico’s laws are favorable for cryptocurrency investors, there are several factors to consider before leaving the chilly Northeast for Puerto Rico’s sunny shores:

Understanding Puerto Rico’s Capital Gains Tax Exemption for Digital Assets

Through amendments to Puerto Rico’s tax laws in 2012 and 2019, the U.S. territory eliminated the capital gains tax entirely for qualifying digital assets held long-term. Contrasting these amendments with the U.S. federal capital gains tax rates – which can be as high as 37 percent – it’s not hard to see why cryptocurrency investors in the U.S. might have an interest in relocating to Puerto Rico.  

But, avoiding capital gains tax on cryptocurrency gains is not as simple as renting a part-time residence in Puerto Rico. In an article published last year, the  Association of International Certified Professional Accountants (AICPA) explained:

“Eligible persons can obtain a 100% tax exemption, lasting until the end of 2035, from Puerto Rican income taxes on dividends, interest, and capital gains accrued after becoming a bona fide resident of Puerto Rico. Gains generated from . . . digital assets based on blockchain technology are eligible, among other asset categories. Certain conditions must be met to qualify, including . . . a requirement to make annual contributions of at least $10,000 to not-for-profit organizations operating in Puerto Rico and acquisition of residential real property within two years of the start of incentives.”

As the AICPA notes, Puerto Rico’s capital gains tax exemption for digital assets only applies to capital gains that accrue after a taxpayer relocates to the territory. Thus, taxpayers who relocate must still ensure that they accurately calculate and pay their federal income tax liability on cryptocurrency gains accruing prior to the date they become a “bona fide resident” of Puerto Rico. Those who don’t can face steep penalties, and the Internal Revenue Service (IRS) has made clear that it is prioritizing enforcement of U.S. taxpayers’ cryptocurrency tax liability.

What does it mean to become a “bona fide resident” of Puerto Rico? “Bona fide residency” is defined in 26 CFR Section 1.937-1. This is a lengthy and complex regulation, and Massachusetts residents who are considering a move to Puerto Rico in order to avoid federal cryptocurrency tax liability will want to prepare in advance to make sure they are able to establish bona fide residency—and prove that they have established bona fide residency to the IRS.

Contact Boston International Tax Attorney Kevin E. Thorn

If you have questions about moving to Puerto Rico to avoid federal cryptocurrency tax liability – or if you have any other questions about cryptocurrency tax law compliance – we invite you to contact us for more information. To request an appointment with Boston international tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 617-692-2989, email ket@thornlawgroup.com or inquire online today.