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?





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.


This One Might Be Taxing.

Headline:  Crypto Mining taxation

Body:  Taxes are nobody’s friend, and when a new one is added, there is an outpouring of outrage.  I very well remember being in Philadelphia when there was a new “soda tax” added to the panoply of taxes.  People complained bitterly (especially if they had  kids at home) and bottlers were up in arms.  The rationale was simple: The government needed more money (when do they not) and soda is unhealthy for you, so, this could dissuade casual use.  Now it would appear that the government might be trying to impose a separate tax on mining bitcoin.  It would appear that the rationale is similar.  So, how does this new proposed tax work?  Let’s  plumb the depths a bit and find out.

What exactly is the reasoning?  After all, bitcoin mining doesn’t rot your teeth.

No, your teeth are likely to be ok.   But, the current administration is proposing that they would tax up to 30% of a miner’s electricity costs.  Many of these “rigs” are bootstrapped supercomputers, and the heat they create is intense.   So, the cooling needed to compensate is HUGE as well.  Essentially, the government (thru its green initiative) wants to really make people think twice before taking this on, and placing themselves in danger and using massive amounts of electricity. (It’s true that some industries take FAR more electricity, but the claim is that these industries contribute a lot more to the national economy, usually in many industries.) The DAME tax would go toward compensating the American People.  Despite the name, the tax would mainly affect the Bitcoin area as the other major cryptocurrencies use the proof of stake consensus model.  Per the White House estimates, the DAME tax could derrive revenues of $3.5 Billion over 10 years.

What are the arguments against the DAME tax?

Cryptomiers will quickly claim that they use sustainable sources of electrical power that do not pull significantly from the grid, thus denying one reason for the tax.    They also suggest that since cryptocurrency is global, if the tax is set too high, the miners will simply decide to go to another country that offers a better deal.

The Verdict

Tax policy is not sexy.   It shouldn’t be, really.   Going back to fundamentals, we have to remember the 2 large reasons to have taxation.   First, it funds our government (cue all the jokes about saussage-making, etc.)  This is well known, but the second prong is not oft-remembered.    The tax code is written to change behavior of the citizens.  Fraud is considered especially heinous, so, there is a code section that lays out large penalties if caught.  The government is trying to change the behavior of some citizens, in order to make life better for all.  There are thousands of other mechanisms like this one, and each one is designed to modify behavior.  So, the DAME tax, to me, is not as much of a stretch as some make it out to be.


Biden Wants 30% Crypto Mining Tax, But Can It Work? (investopedia.com)

Riot Platforms (RIOT), Marathon Digital (MARA) Could Face Hefty U.S. Crypto Mining Tax (coindesk.com)

How Crypto Taxes Work In New Zealand | CoinLedger

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.