The capital gains loophole in Puerto Rico refers to the significant tax advantages available to residents under Act 60, particularly for capital gains on assets like cryptocurrency. Here’s how it works:

1. Zero Capital Gains Tax on Puerto Rico-Sourced Gains

• Once you become a bona fide resident of Puerto Rico under Act 60, certain capital gains—such as those from cryptocurrency trading—can be entirely tax-exempt if the gains are realized while you are a resident. This is especially beneficial for active crypto investors who might otherwise face substantial capital gains taxes in the U.S.
• For example, a capital gain of $100,000 from crypto trading could incur $0 in Puerto Rico, whereas in the U.S., it might attract up to $20,000 in federal capital gains taxes.

1. Additional Tax Savings for Long-Term Residents

• For assets held before becoming a Puerto Rico resident, capital gains may still qualify for a reduced 5% tax rate if realized after 10 years of residency. This incentivizes individuals to make Puerto Rico their long-term residence.

1. Compliance Requirements

• To maintain these benefits, Act 60 requires meeting the physical presence test (spending at least 183 days in Puerto Rico annually) and establishing Puerto Rico as your primary residence and tax home. You must also make annual charitable contributions of $10,000 to local nonprofits, with 50% going toward organizations addressing child poverty.

1. Tax Planning for Crypto Investors

• For maximum savings, many investors sell assets before moving to Puerto Rico and repurchase them after establishing residency. This approach allows new gains to be Puerto Rico-sourced and therefore eligible for the 0% tax rate.

1. Risks and IRS Audits

• U.S. citizens using this loophole must carefully comply with residency rules and documentation to avoid potential issues during IRS audits. Failure to meet eligibility could result in retroactive taxation with penalties and interest.
  
  

For crypto traders and high-net-worth individuals, this “loophole” in capital gains taxation makes Puerto Rico a popular destination for significant tax savings.

However, careful planning and compliance are essential to avoid future tax liabilities.