You are an American crypto trader who is currently sitting on a ton of cryptocurrency. You’ve been at this long enough to see your potential to cash in on millions is right around the corner if you play your cards right by 2021.
You have big and very realistic dreams of being a millionaire sitting at your fingertips as many crypto analysts anticipate the next potentially epic bull run is on its way.
At the same time, you have been terrified by all of the hype regarding the IRS crackdown on cryptocurrency.
You are being advised not to take this crackdown lightly, and you have enough wits to know you must take these warnings very seriously by educating and preparing yourself for what’s to come.
But, knowing that you may not have reported your past earnings correctly is sending you into a full-blown panic most days.
You are worried about the IRS coming after your crypto earnings. And, you’re looking to save money on your 2020 tax bill.
However, your biggest concern is making it big when the time comes to cash in your crypto.
If you expect to sell crypto and avoid taxes on your earnings in 2021, you cannot wait until the year 2021. You need to act now in 2020.
We are going to explain why crypto traders should move to Puerto Rico to cash in on special tax incentives and why you need to take action now to take advantage of these tax benefits.
Our goal is to help get you in front of this problem/opportunity, not to be the last one behind it. Read on to find out what you need to understand about Puerto Rico’s tax opportunity and how to prepare for it as of today.
Tell me more about why crypto traders should move to Puerto Rico.
The chances are high that you’ve heard about the fantastic opportunity for U.S. citizens relocating to Puerto Rico to reduce their corporate tax to 4% and to reduce their personal income tax on capital gains to 0%.
You have a general understanding that Puerto Rico could be your golden ticket to savings on your 2020 tax bill.
And you are beginning to see that the tax-free benefits of that big crypto cashout everyone is anticipating could lead to early retirement if you are living in Puerto Rico when the next bull run hits.
Still, you are not exactly sure how you qualify for this tax saving act.
You are also unclear about the severe lifestyle changes that will need to be considered.
And most importantly, you have no idea how to prepare.
Read on to find out how you can qualify, the lifestyle changes that you will need to consider, and how to start preparing now to make it a reality.
I want to understand how I qualify to save money on my crypto taxes in 2020 and beyond.
How do I save money on my 2020 crypto tax bill?
If you’re looking to save money on your 2020 tax bill, you might want to consider relocating to Puerto Rico no later than July 2, 2020, to qualify for the year.
Because while you may not be unable to change how government regulators will decide to tax cryptocurrencies, you can change your tax future!
Moving to Puerto Rico will allow you to take advantage of Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019), formerly known as Act 22, to pay no federal income tax from here out.
And, we know that saving money on your taxes is about one of the most substantial risk-adjusted returns there is.
Can I move to Puerto Rico to avoid taxes?
You can avoid tax by moving to Puerto Rico through one of the tax programs, formerly named Act 22 (now referenced as Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019). This Act requires that you have NOT lived in Puerto Rico during the previous 15 years. And, therefore, allowing you to take advantage of a 4% income tax rate, 0% dividend rate, and 0% capital gains tax rate.
Please be aware that BOTH YOU and YOUR BUSINESS need to make a literal move to Puerto Rico. It has to become your “tax home.” More on this later, when we talk about making closer connections to Puerto Rico than the United States.
Why should crypto traders move to Puerto Rico?
Act 22 was born as the Resident Individual Investor Act. It was enacted in Puerto Rico in 2012 to promote the relocation of high-net-worth individuals to Puerto Rico. The law’s goal was to provide attractive incentives to encourage investors to relocate to Puerto Rico.
*Please also note that new applicants will be subject to the most recent requirements from January 1, 2020.
Puerto Rico has a very unique tax status.
It is a territory of the U.S. but it is viewed as a “foreign country” for U.S. federal income tax purposes.
Therefore an individual tax applies to its residents along with tax incentives geared to promote its economic development that may be very luring for U.S. Crypto Traders.
If both you (as a bona fide resident) and your business (as your tax home) move to Puerto Rico, then all your future capital gains on stocks, bonds, and other assets (as defined to include commodities, currencies, and any other digital asset or blockchain technology, a.k.a. crypto) become tax-free. In short, all your dividends, interest, and royalties you may receive from Puerto Rican sources become tax-free. (1)
What was Puerto Rico’s Act 22, and what is it called now?
Puerto Rico’s Act 22 was the Act to Promote the Relocation of Individual Investors to Puerto Rico. It has since been updated and bundled with other popular tax incentives and now called the Puerto Rico Incentives Code (Act 60-2019) referenced in Chapter two. Replacing the name Act 22 with Act 60-2019 as the law on July 1, 2019, with an Effective Date of January 1, 2020.
*You will be obliged to follow the most recent requirements applying as a new bona fide resident.
Its intention was to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all interest and dividends earned after the individual becomes both a bona fide resident of Puerto Rico. Along with filing their business in Puerto Rico, as their tax home.
What are the benefits of chapter two of Act 60-2019 (formerly known as Act 22)?
- 100% tax exemption on interest and dividends derived, AFTER becoming a resident of Puerto Rico and through December 31, 2035. (2)
- 100% tax exemption from Puerto Rico income taxes on all capital gains accrued, AFTER establishing residency. (2)
- 100% tax exemption concerning gains from the sale of property acquired AFTER the individual becomes a bona fide resident of Puerto Rico if the sale takes place before January 1, 2036. (2)
- Investment income accrued before becoming a bona fide resident of Puerto Rico will be taxed at 10% if realized within ten years after residency is established. If the gain is achieved after the ten years, but on or before December 31, 2035, the tax is 5%. (2)
- Capital gains appreciation on investments that occur after becoming a bona fide Puerto Rico resident can allocate to Puerto Rico.
Special rules apply to the gain from the sale of securities acquired before the establishment of residence in Puerto Rico.
We asked Juan Robles of Etrends Group about these special rules.
Any appreciated property acquired in the US and later sold while a resident in PR will still have US tax implications. For US tax purposes, virtual currency is treated as property and US Regulation Section 1.937-2(f) provides that any gain may be subject to an allocation based on holding period (bifurcation rule).Juan Robles, CPA Partner, Etrends Group
What is Act 60-2019?
“The Governor of Puerto Rico signed into law the Puerto Rico Incentives Code as Act 60‐2019 (the “Incentives Code”). In general, the Incentives Code compiles into a single code many of the Puerto Rico tax incentives laws used to promote the island’s economic development, with some modifications, in order to establish a new transparent and efficient process for granting and overseeing all the incentives afforded under the Puerto Rico’s incentives laws. The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including Act 20, the Promotion of Export Services Act, and Act 22, the Act to Promote the Relocation of Individual Investors to Puerto Rico.” (3)
I want to understand the lifestyle changes that I need to consider by moving to Puerto Rico.
I’m not a crypto billionaire. Do Puerto Rico’s tax incentives still make sense for me?
Yes! You may not be a crypto billionaire yet, but plenty of you are sitting on a lot of crypto that you want to sell when it’s worth it. Many crypto traders are going to Puerto Rico with the anticipation of becoming a crypto billionaire.
Cryptocurrencies and other crypto assets are explicitly included as eligible for tax exemption.
And, there is no better risk-adjusted return than saving money on taxes. Gain an extra 30% return on investment without the risk by saving on your taxes. Compounded over your lifetime, that is a considerable amount of savings for changing nothing but the place you legitimately call home. (4)
Do you have to file taxes if you live in Puerto Rico?
Yes, residents of Puerto Rico pay federal payroll taxes, such as Social Security and Medicare taxes.
PR (Puerto Rico) source income earned by US citizen or resident alien is excluded from US taxes (US Code Section 933 exclusion).
Any PR resident that has US source income must file federal taxes.Juan Robles, CPA Partner, Etrends Group
I want to start preparing now to make saving taxes from Puerto Rico a reality in 2020.
What is the first action step to take?
The first and most critical step, however, is wrapping your head around how fast you have to make this happen if Puerto Rico is the right move for you.
You want to be a bona fide resident of Puerto Rico by June 2, 2020, in order to save on your 2020 tax bill.
Crypto traders need to understand what rules they need to comply with to take tax advantage of this opportunity legally.
They must understand that they will be selling and rebuying their crypto. For more information, schedule a consultation at Donnelly Tax Law.
They must thoroughly understand residency compliance and how to form a closer connection to Puerto Rico than to the U.S. For more information, consult the Etrends Group in Puerto Rico. Here at Donnelly Tax Law, we partner them by providing the crypto calculations for them to file a crypto trader’s taxes in Puerto Rico.
How can you prepare for this move?
- You must become a bona fide resident of Puerto Rico.
- You must prepare to unload your crypto (You have to turn it over.) Meaning, you will sell it and immediately repurchase it as a bona fide resident of Puerto Rico.
- You must create closer connections. Meaning, you must create “closer connections” to Puerto Rico than the United States.
Does a trader have to rebuy his inventory of coins upon becoming a bona fide resident?
The short answer is YES if he wants to enjoy PR’s 0% capital gains rate. Under Act 22, the 0% cap gain tax rate only applies to assets bought AFTER becoming a bona fide resident of PR. Assets acquired before to receive a 15% tax rate.
What does this mean to the potential crypto trader considering moving to Puerto Rico?
The 0% rate only applies to assets purchased after becoming a bona fide resident. That is the date that you receive the official designation from Puerto Rico of long term residence status and after the 183 days of residence have been completed.
If, after that date, the trader sells his inventory of coins and repurchases them promptly, he will incur the Puerto Rico 15% tax on any capital gains realized in this sale. It is possible that the trader might pay some hefty capital gains taxes this first year in Puerto Rico.
Hey, the US long term capital gains tax is 15% (for everyone except those in the highest tax bracket). You don’t need to move to Puerto Rico to get that rate. Of course, there is a 3.8% Net Investment Income Tax (NIIT).
This repurchase is NOT a requirement of US tax law. Under US law 26 CFR 1.862-1. Personal property sold in Puerto Rico is considered Puerto Rico income as far as the US is concerned.
Why do crypto traders have to move to Puerto Rico by June 2, 2020, to take advantage of the particular Act 22 treatment?
If you expect to sell crypto and avoid taxes in 2021, you need to act in 2020 because you must establish yourself as a bona fide resident of Puerto Rico to qualify yourself for the 2020 tax year.
You will need the time (and a good amount of money) to apply to become a bona fide resident. Prepare to give yourself about six months.
Give yourself a week’s time, in order to complete the basic information on your application and get your criminal record issued from the state.
Give yourself an additional five months for the government portion (but please be rest assured that your residency status is back-dated to the original filing date).
How long do you have to live in Puerto Rico to be a bona fide resident?
Generally, you must reside there for at least 183 days a year. There are many grey areas and nuances that you want to be clear on if you are going to take this step, so be sure to position yourself with a team of crypto and Puerto Rico tax experts from the start. You also have to do the paperwork, applying with the tax authority there.
The application for an Act 22 Decree must include the payment of a $750 filing fee, but do expect to invest thousands more into applying and relocating yourself here.
What is a bonafide resident of Puerto Rico?
A bona fide resident of Puerto Rico can exclude their Puerto Rico source income from U.S. federal tax. Generally, under IRS §937 and the regulations thereunder a bonafide resident of Puerto Rico is an individual who:
You must qualify as a bona fide resident of Puerto Rico FOR THE ENTIRE TAXABLE YEAR for purposes of the US IRC and (2) the income must constitute Puerto Rico source income under the US IRC.
Please note the wording to qualify for the exclusion for a taxable year. You must be a bona fide resident of Puerto Rico for the “Entire Taxable Year.”
This text is why you must be living in Puerto Rico no later than July 2, 2020, if you want to cash in on the next epic Bull run predicted for 2021.
You will have to have been in Puerto Rico one full taxable year.
Again generally, you must be physically present and living in Puerto Rico for AT LEAST 183 days during the taxable year.
You must not have a tax home outside of Puerto Rico during the taxable year.
You must pay an annual charitable contribution for a non-profit entity of $10,000. It must be paid annually under the new Act 60-2019.
You must purchase property in Puerto Rico within two years of obtaining the decree under the new Act 60-2019.
This property must be your primary residence throughout the validity of the decree. You must hold exclusive and complete ownership of the residential property for the duration of the decree. Joint ownership with your spouse qualifies.
You cannot rent the property out to someone else.
The determination of whether or not an individual is a bona fide resident of Puerto Rico for a taxable year is made according to rules outlined in the regulations issued under Section 937(a) of the US IRC.
You must not have a closer connection to the United States or a foreign country than to Puerto Rico.
How do I create closer connections to Puerto Rico?
- Where is your bank account?
- Where is your driver’s license?
- Where are your relevant documents located?
- Where is your high school diploma? Your college degree?
- Where are your wife/husband and children living?
- Where does your mail go?
- Where are your investments?
- Where do you own your house?
If you have answered the U.S., you have not created closer connections to Puerto Rico than the U.S. Make sure that you are moving your real life to Puerto Rico.
There are various factors, all of which must be met by the individual to qualify as a “bona fide resident of Puerto Rico.”
They can be extremely intensive and a variety of factors will be considered. Therefore, individuals seeking to take advantage of these benefits should schedule a consultation with us and Puerto Rico Tax Experts Etrends for clarity and guidance through the process.
What is Law 40-2020?
This post was updated with this information on May 21, 2020.
On April 16 Puerto Rico Governor Wanda Vazquez approved, Law 40-2020, that alters the way tax incentives are provided to new residents. The previous annual fee of $300 for those who moved to the island and applied for the incentive has been substantially increased. It has now jumped up to $5,000. In addition, there is also a new tax contribution reduction equal to 3% for anyone who earns $100,000 or less.
To summarize total costs including Law 40-2020:
Now, for anyone wishing to move to the island, the upfront expenses are much higher, somewhat negating the existing tax incentives. There is a $750 filing fee, a $5,000 “special fund fee” if the filing application is approved, a $10,000 obligatory annual contribution (with the possibility of having the fee made in two payments), and the new $5,000 fee.(5)
What does $97 a year do to protect you from the IRS in Puerto Rico and on the mainland?
Just because you are in Puerto Rico doesn’t mean you are exempt from U.S. audits. As long as you are a U.S. citizen, you do not escape the eye of the IRS.
Regardless of where you live in the world, you need to file an income tax return with the U.S. as a citizen of the United States. So, going to Puerto Rico doesn’t mean you don’t have to file a U.S. income tax.
If you make less than 12,000, you don’t have to file a tax return. But, if you are still making an income above 12,000 worldwide after subtracting Puerto Rican income, you will have to file a tax return in the U.S.
Therefore you want assurance that you have crypto representation should you get the dreaded letter from the IRS.
Our goal is to help get you in front of this problem/opportunity by using annual tools like CryptoTaxAudit to provide you with representation year-round should you need representation with the IRS.
Protect yourself today with crypto tax audit defense for only $97 for the year!
The time to take action is now!
Well done! By reading this post, you have already taken the first step toward understanding an excellent solution to protect your crypto earnings in light of the current IRS crackdown on virtual currency. Now you know plenty of reasons why crypto traders should move to Puerto Rico and how.
You have also come one step closer to having an action plan to realize your dreams of becoming a crypto millionaire when the next potential epic bull run hits.
You are ready to play your cards right. And, clearly see your potential to cash in on millions is right around the corner if you play your cards right by 2021.
Remember, if you expect to sell crypto and avoid taxes on your earnings in 2021, you cannot wait until the year 2021. You need to act now in 2020.
Our goal is to help get you in front of this problem/opportunity by using tools like CryptoTaxAudit to provide you with representation should you need it with the IRS.
Donnelly Tax Law is the leading US tax firm for preparing complex U.S. tax returns for Americans, including crypto traders and people with foreign assets.
We are currently partnering with the Puerto Rican tax and accounting firm Etrends Group for Act 22 clients.