Puerto Rico Crypto Tax Haven Targeted by New Legislation

A member of the House of Representatives has introduced legislation aimed at preventing investors from utilizing the US territory of Puerto Rico as a crypto tax haven. The Fair Taxation of Digital Assets in Puerto Rico Act, proposed by New York Representative Nydia Velázquez, seeks to amend existing laws in the territory to mandate certain investors to pay both local and federal taxes on capital gains, including those from digital assets. This legislation would modify Puerto Rico’s Internal Revenue Code to subject cryptocurrency income to federal tax laws.

Rep. Velázquez expressed concerns that the influx of crypto investors has not benefited Puerto Rico’s recovery or strengthened the local economy. Instead, it has driven up housing costs, displaced local residents, and added pressure to an island where nearly 40% of people live in poverty, while costing the federal government billions in lost tax revenue.

Puerto Rico has long been recognized as a tax haven for many in the crypto industry, thanks to exemptions introduced in 2012 under Act 20 and Act 22 of the Tax Incentives Code, later consolidated as Act 60. The island has attracted notable investors, including Pantera Capital founder Dan Morehead, venture capitalist Brock Pierce, and online influencer Logan Paul.

According to Rep. Velázquez’s office, Puerto Rico could lose roughly $4.5 billion in revenue from 2020 to 2026 due to the current tax incentives. In contrast, Puerto Rico Governor Jenniffer González-Colón proposed extending Act 60, set to expire in 2035, to the end of 2055. However, this extension would require applicants to be subject to a 4% capital gains tax rate, which is lower than the typical range up to 37% in the US.

The political support for Rep. Velázquez’s legislation remains uncertain, given the Republican-controlled House and Senate. Both chambers are expected to consider floor votes for stablecoin legislation and a crypto regulatory framework in the coming months. The proposed bill aims to close loopholes that have allowed investors to exploit Puerto Rico's tax incentives, particularly those who move to the region primarily for tax purposes, often referred to as "tax refugees."

The legislation seeks to impose stricter residency requirements and increase scrutiny on individuals who claim Puerto Rico as their primary residence for tax purposes. It also aims to ensure that those benefiting from the region's tax incentives are genuinely contributing to the local economy and community. This move comes as lawmakers address the broader issue of tax avoidance and evasion in the digital age, where cryptocurrencies have made it easier for individuals to move assets across borders without detection, complicating tax tracking and collection.

The proposed legislation is part of a broader effort to reform the tax code and ensure that all individuals and corporations pay their fair share of taxes. It is expected to face opposition from those who benefit from the current tax laws, as well as from those who argue that the legislation could have unintended consequences for the local economy and community. The debate over the use of Puerto Rico as a tax haven for cryptocurrency investors underscores the complex interplay between tax policy, economic development, and social justice. As lawmakers continue to grapple with these issues, finding a balance between attracting investment and ensuring fairness in the tax system will be a key challenge in the years to come.