US Authorities Targets Crypto Investors as Puerto Rico Becomes a Tax Haven

Puerto Rico has long been considered a haven for crypto investors seeking tax relief, but recent developments may signal a shift in this status. 

On April 21, New York Representative Nydia Velázquez introduced a new bill aimed at curbing the influx of cryptocurrency investors into US territory. 

The proposed legislation, known as the Fair Taxation of Digital Assets in Puerto Rico Act, could have significant implications for the local and federal tax landscape, particularly for those taking advantage of Puerto Rico's favorable tax policies for digital assets.

The Growing Appeal of Puerto Rico as a Crypto Tax Haven

Since the enactment of Act 20 and Act 22 in 2012, which were later consolidated into Act 60, Puerto Rico has attracted numerous high-profile crypto investors. These tax incentives allowed investors to significantly reduce or eliminate taxes on capital gains derived from digital assets. 

Notable figures, including Pantera Capital founder Dan Morehead, venture capitalist Brock Pierce, and even influencer Logan Paul, have moved to the island to capitalize on these benefits.

However, the tax haven status of Puerto Rico has come under increasing scrutiny. Critics argue that the influx of wealthy crypto investors has led to unintended consequences, such as driving up housing costs, displacing local residents, and failing to significantly contribute to the island's economic recovery.

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Velázquez’s Legislation: A Move Toward Fair Taxation

In response to these concerns, Rep. Nydia Velázquez introduced the Fair Taxation of Digital Assets in Puerto Rico Act. 

The bill aims to make income from cryptocurrencies subject to federal tax laws, closing a significant loophole that currently allows crypto investors to bypass taxes on their capital gains. By amending Puerto Rico's Internal Revenue Code, the legislation would effectively end the tax incentives that have made the island a haven for digital asset investors.

Rep. Velázquez argues that Puerto Rico has not benefited from the crypto boom in the way many expected. 

Instead, she claims that the tax incentives have exacerbated the island’s existing socio-economic issues, including its high poverty rate of nearly 40%. 

She pointed out that the federal government is losing billions in tax revenue as a result of these exemptions, which she believes is unfair to both Puerto Rican residents and US taxpayers.

The Economic Impact of Puerto Rico’s Crypto Tax Exemptions

One of the central concerns of Rep. Velázquez’s bill is the estimated loss of tax revenue due to Puerto Rico’s favorable tax policies. According to her office, Puerto Rico could forfeit approximately $4.5 billion in revenue between 2020 and 2026. 

While Governor Jenniffer González-Colón has proposed extending the Act 60 tax incentives through 2055, her plan would introduce a more modest 4% capital gains tax rate for new applicants. 

This is still lower than the federal tax rates in the mainland US, which can reach up to 37% for high earners.

However, it remains to be seen whether this proposal will garner enough support in the US Congress, where the House and Senate are both currently controlled by Republicans. 

The fate of the bill may hinge on broader political negotiations surrounding crypto regulation, including the regulation of stablecoins and broader frameworks for digital asset oversight.

Also Read: First XRP ETF Approved in Brazil, Not U.S

What’s Next for Puerto Rico’s Crypto Tax Incentives?

As the debate over Puerto Rico’s tax haven status intensifies, the future of the island’s crypto-friendly policies is uncertain. While the proposal from Rep. Velázquez represents a challenge to the status quo, it also reflects growing concerns about fairness and the long-term sustainability of these tax incentives.

Puerto Rico’s role as a tax haven for crypto investors may ultimately depend on how lawmakers balance the island’s economic needs with the broader goals of tax fairness and revenue generation. 

As legislation around cryptocurrency continues to evolve, both investors and residents of Puerto Rico will be watching closely to see how these changes unfold.

FAQ

What is the Fair Taxation of Digital Assets in Puerto Rico Act?

The Fair Taxation of Digital Assets in Puerto Rico Act is a proposed piece of legislation introduced by Rep. Nydia Velázquez. 

It seeks to amend Puerto Rico’s Internal Revenue Code, making income from cryptocurrencies subject to both local and federal tax laws. The goal is to end the tax incentives that have made Puerto Rico a popular destination for crypto investors.

Why is Puerto Rico considered a crypto tax haven?

Puerto Rico’s tax incentives, primarily through Act 20 and Act 22 (now consolidated as Act 60), have allowed crypto investors to enjoy significant tax exemptions on capital gains. 

This has made the island an attractive option for high-net-worth individuals in the crypto industry, who are looking to reduce their tax liabilities.

How much tax revenue could Puerto Rico lose due to these exemptions?

According to Rep. Velázquez’s office, Puerto Rico could lose approximately $4.5 billion in revenue between 2020 and 2026 due to the tax exemptions offered under Act 60.

How might this legislation affect crypto investors in Puerto Rico?

If passed, the Fair Taxation of Digital Assets in Puerto Rico Act would require crypto investors to pay federal taxes on their capital gains, which could significantly reduce the tax benefits they currently enjoy. The legislation would close the loophole that allows these investors to avoid federal taxes.

What other changes are being proposed for Puerto Rico’s tax policies?

In addition to the proposed legislation from Rep. Velázquez, Puerto Rico’s Governor Jenniffer González-Colón has suggested extending Act 60’s tax incentives until 2055, but with a 4% capital gains tax rate for new applicants. This is lower than the federal tax rates in the US, which can reach up to 37%.