Puerto Rico Tax benefits for cryptocurrency holders

With the recent rise in cryptocurrency prices, hodlers are looking for ways to reduce their tax liabilities. It turns out that a little known set of laws that were passed in 2012 may provide an amazingly good answer to this problem. Let me preface this article by saying, I'm not a tax attorney or an accountant so please do your own due diligence and seek professional advice before making any major decisions.

The 16th-century fort, Castillo San Felipe del Morro, in San Juan, Puerto Rico.

In 2012, Puerto Rico passed two acts to promote the relocation of investors to Puerto Rico. The acts, known as act 20 and act 22, exempt investors from all capital gains and dividends provided they meet the requirements as a "Bona Fide Resident of Puerto Rico". There are a number of details about what it means to be a "Bona Fide Resident of Puerto Rico", which we will get into later.
This will be music to the ears of crypto investors who have unrealized gains in Bitcoin and other cryptocurrencies. Also, any dividends are not taxed under the act as well. This is important due to the recent crypto-dividends Bitcoin Cash, Bitcoin Gold and Bitcoin Private among others surely to come. How much can you save? Well, the federal tax rate on capital gains is 0 - 20% graduated and after $37,951 you are already at a 15% rate. Also many states have capital gains. If you're in California, they quickly go to over 10%. New York and many other states have a similar tax. So, you could easily be looking at a 30% tax on your capital gains from Bitcoin and other cryptocurrencies.

Abolition Park in Ponce, Puerto Rico.

There is one thing that should be pointed out about the law before we go further. There is a concept of "built-in" capital gains which everyone should be aware of. If you decide to follow this procedure, you still have to pay capital gains tax on any assets you bought before you became a bona fide resident, however there are some caveats to this rule that have significant impact. The first caveat is that you only pay taxes on gains that you made before becoming a resident. So, lets say you bought Bitcoin at $5000 and you moved to Puerto Rico when the price hit $6000. Subsequently, you sell Bitcoin at $10,000. You would only pay capital gains tax on the $1000 gain you made before moving. You would pay this tax at the Federal rate of 0-20%. This is huge, especially if you think Bitcoin's price will rise significantly. In addition to this you will not pay any state capital gains taxes that you would normally be required to pay had you stayed in your home state. Additionally, any profits made from cryptocurrency forks (i.e. Bitcoin Cash, Bitcoin Private, Bitcoin Gold, etc) would be tax free from that point on. Lastly, if you remain a bona fide resident of Puerto Rico for 10 years, the 0-20% capital gains rate will reduce to a maximum of 5%. So, if you became a bona fide resident today, and the price of Bitcoin goes up substantially you could end up paying a very small rate of tax and pay nothing on future gains. You would also be freed up to make trades when you see fit without worrying about how much you'll lose in capital gains tax.
Now that we've discussed the benefits, you might be wondering, what does it mean to become a bona fide resident of Puerto Rico? Well, there are two tests that you must pass.
1.) The presence test
2.) The closer connection test
The presence test is more straight forward. All you have to do to pass the presence test is to be in Puerto Rico for at least 183 days of the year or not be present in the United States for more than 90 days. That's right, you could be a bona fide resident and not set foot in Puerto Rico all year as long as you are outside the United States for 3/4 of the year.
The second test is the closer connection test. To meet the closer connection test, you need to have what the IRS considers a "closer connection" to Puerto Rico than the US. I suggest reading the actual form that you must fill out to notify the IRS that you are becoming a bona fide resident of Puerto Rico. It is called form 8898 and can be found here: https://www.irs.gov/pub/irs-pdf/f8898.pdf. There are a number questions which will be used to determine if you have a closer connection to Puerto Rico than anywhere else. Most of these are fairly easy to do in such a way that you can show a closer connection to Puerto Rico than the US. I suggest you think about each question and make a plan to make the answer to all of them in a way that you are considered to be having a closer connection to Puerto Rico. As an example, you can easily register to vote or get a driver's license in Puerto Rico if you have an apartment there. This brings up the subject of an apartment. Realistically, if you are going to claim to be a bona fide resident of Puerto Rico, you need to at least have an apartment in Puerto Rico. The good news is you can get an apartment for as little as $250/month in Puerto Rico. If you want to get one of the very high end apartments in San Juan with an ocean view, it may cost you around $2000/month. Keep in mind, if you keep a home in the US, you will probably want to make sure the home in Puerto Rico is at least comparable to the one in the US otherwise an argument might be made you are not really a bona fide resident. Also, you probably will want to stay in as nice a place as your US location.
In addition to the tax savings from becoming a bona fide resident, you should take into account other taxes on the island and the cost of living. It is important to note that Puerto Rico has an 11.5% sales tax. This is higher than any other states and should be considered. But, from what I can see, this is not much of an issue because things are generally significantly cheaper, even in San Juan than they are, at least in California so while the tax is a little higher, the total cost is significantly less. There are also property taxes, but they are fairly low and if you are renting you are indirectly paying that tax, but rents in Puerto Rico are generally lower than most of the US. So, all in all I would say that those taxes do not adversely affect the decision about whether to move here and the decision should be made primarily based on whether it's worth it or not save on the capital gains and crypto dividends that you anticipate making and whether you want to be outside of the US for that amount of time each year.
Now that we've talked about the financial aspects of this decision, lets talk about the Island itself. Puerto Rico is a beautiful Island. It has beautiful beaches, mountains, and large cities as well. There is still significant damage from Hurricane Maria, but a lot of construction is going on to rebuild, in particular in the more populous areas like San Juan. People with capital from gains in cryptocurrency may find opportunities here to both make a profit and help rebuild the island at the same time. Also, part of Act 20 and 22 relate to starting businesses and there are substantial tax savings in doing that as well. That's probably a subject for another blog though. Spanish is the primary language, but in the more populous areas, practically everyone will be able to speak English. Uber is available, so you don't need to own a car if you don't want to particular in the large cities. The people of Puerto Rico are warm and inviting. They are a diverse group coming from many different backgrounds.

The coast at Patillas, Puerto Rico.

One more important note is that you will still have to pay income taxes on US sourced income so if you have a job in the US or you own a rental property in the US, you will still have to pay income taxes on that income but any income you make online would be exempt (like earning money writing for steam, etc).
So, in conclusion, if you have made gains in cryptocurrencies and think you will be achieving greater gains in the future, it might make sense for you to consider becoming a bona fide resident of Puerto Rico. Below are some references that have been discussed in this post.

http://www.portocapital.com/puerto-rico-bona-fide-residents/
http://www.portocapital.com/puerto-rico-bona-fide-resident-presence-test/
http://www.portocapital.com/puerto-rico-bona-fide-resident-tax-home/
http://puertoricotaxincentives.com/
https://www.irs.gov/pub/irs-pdf/f8898.pdf
http://premieroffshore.com/changes-puerto-ricos-act-20-act-22/