What happens in Puerto Rico Might NOT Stay in Puerto Rico.
Headline: Is there a cryptocurrency fiesta in Puerto Rico?
Body: How does any bank heist movie end? The bad guys are kicking back on a beach, enjoying drinks, looking at the well-endowed 20 year-olds frolicking in the sand, and loving life. Well, what if this wasn’t EXACTLY fictional? What if it weren’t even illegal?
OK, so, writ large, what are we talking about?
Puerto Rico offers its residents many tax breaks, but to qualify, the person must reside on the island for 183 days per year AND maintain “close local ties.” When executed correctly, many types of passive income can remain untaxed. Currently, there are more than 5,000 individuals who qualify for this treatment. The program is called the “export service incentive” and can allow a corporation to pay a 4% tax rate.
But, those who do not qualify, and claim that they do, should watch out. There are currently 2 such criminal investigations ongoing. These investigations largely center around conspiracy and wire fraud, but each one involves a good many parties, including promoters, attorneys and accountants. Further, many locals are unhappy with this arrangement; They claim that the policy advantages American investors who are not native to Puerto Rico. Regardless of these remonstrations, the government of Puerto Rico just expanded these tax benefits to investors in cryptocurrency and digital assets and services.
Does Puerto Rico have future taxation plans?
At some point soon, Puerto Rico will begin to tax cryptocurrency that has been staked against another transaction. They are looking toward, in the future, toward taxing transactions relating to buying and selling NFTs.
A few warnings and pieces of advice.
A local CPA, Shehan Chandrasekera, suggests caution regarding this tax break. He particularly warns potential clients, that any capital gains received prior to getting Puerto Rican residency are still likely to be taxed at the much higher rate. Just after this, the text suggests that there is a way that cheats CAN get the benefit of the tax laws, by selling their investment and then re-buying essentially the exact same investment. Puerto Rico is a foreign territory, so laws are different, but within the U.S. there are “wash sale” rules that forbid exactly this behavior. I did a brief research and Puerto Rico appears to have no such rules in effect, but, consultation with a local CPA is strongly encouraged.
This all sounds GREAT!!! What the problem is?
First, it can be well-argued that this tax break is not achieving the goals set for it. The idea was to encourage entrepreneurs and that would lead to more and better jobs for the islanders. Well, the entrepreneurs who came, did not produce products that require an assembly line, and the jobs created are quite thin on the ground. Second, some just see it as unfair. It has set up a situation where native Puerto Ricans are paying 15% tax on capital gains, and the newly-arrived invaders are only paying 4% tax. Further, the new arrivals have served to massively increase property prices, pricing out most of the inhabitants already there.
So, why can’t they just repeal the law?
In theory, they can. But, in practice, I suspect that the crypto-set has some pretty good lobbyists. So, perhaps they can nibble around the edges and make Article 22 more palatable to local citizens.
The Verdict
One thing I keep reading is FOMO or “fear of missing out.” It explains why a lot of people leave the continental U.S. even if the cost of living is substantially higher, when living on an island. The only thing that makes some sense is that a few people mentioned how Puerto Rico, now, appears to be modeled after Austin around 10 years ago. At this point, Austin was adding tech jobs by the bushel, and the constant turnover and compression of many tech firms in one area led to a supernova type event where “tech stars” are born.
There was a second issue that caught my attention. In one of these articles, there was an anecdote about a crypto-bro who developed his own “training course” for cryptocurrency, and for only $1,000 USD, he’d hook you up with all of the material you’d need to make over 6 figures selling digital assets. (Is anybody else experiencing their hackles being raised?) I hate to put it in these terms, but they come to me so quickly, I can’t avoid it. Just after the initial life-saving operations due to a huge storm, the fake contractors and other flim-flam men appear on the community. Their objective, soak up as much cash as possible, then blow town, much like a second storm. I get the feeling that these people are following in the same footsteps. If he REALLY DID have such a great system, I think you have to ask yourself, why is he selling it?
REFERENCES
https://www.cnbc.com/2022/01/16/puerto-rico-low-taxes-island-life-make-it-hot-for-bitcoin-fans.html
https://www.washingtonpost.com/technology/2022/01/13/crypto-puerto-rico/
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.