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Crypto Law/Level VII · Loopholes worth understanding/7.2 Residency and borders/Lesson 2

Puerto Rico and Act 60

How Puerto Rico’s investor incentive interacts with federal tax, what the 2026 changes did, and why coins bought before a move are the usual trap.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. File a Puerto Rico resident individual investor decree application by 31 December 2026 to keep interest, dividends and post-move capital gains exempt from Puerto Rico tax through 2035; applications from 1 January 2027 pay 4% (Act 38-2026).
  2. Federal exclusion under §933 needs bona fide residence for the entire year: at least 183 days present, no tax home outside Puerto Rico and no closer connection elsewhere (§937); notify the IRS on Form 8898 when residence begins or ends.
  3. Only post-move gain is Puerto Rico-source: under 26 CFR 1.937-2(f) pre-move appreciation stays US-taxable if sold within ten years, though an election can source the residence-period share, by days for most non-security property; keep dated price records.
  4. Meet decree conditions every year: a $10,000 annual donation to Puerto Rico nonprofits, buying a primary home on the island within two years, and filing the annual report; a decree is a local grant and does not settle federal residence.
  5. Expect scrutiny: the IRS runs an active ‘Puerto Rico Act 22, Individual Investors Act’ campaign, so keep a day-count calendar and records of home, family, bank, licence and voter registration; FBAR duties for foreign accounts continue.

Materials26 U.S.C. §933 and §937 on Puerto Rico residents and the bona fide residence test (law.cornell.edu)26 CFR 1.937-2(f), the rule on gains from property owned before the moveThe IRS large business and international active campaigns page, which lists the Puerto Rico Act 22 campaign

Wonder

  1. How can a US citizen pay no federal tax on gains by living in a US territory?
  2. Did Puerto Rico change the deal in 2026?
  3. What happens to coins I already held before moving?

Explore

  1. Puerto Rico is a US territory with its own income tax. Under 26 U.S.C. §933, a US citizen who is a bona fide resident of Puerto Rico for the entire tax year excludes income from Puerto Rico sources from federal gross income. Puerto Rico’s Incentives Code, Act 60-2019, offers a ‘resident individual investor’ decree that for years exempted qualifying interest, dividends and capital gains from Puerto Rico tax. Put together, a gain that counts as Puerto Rico-source income and is exempt locally can face no federal and no Puerto Rico income tax. That combination is why the island draws crypto holders, and why both systems test it closely.
  2. Puerto Rico changed the investor programme in 2026. Act 38-2026 extends the programme to 31 December 2055 and imposes a 4% Puerto Rico tax on dividends, interest and certain capital gains for people who apply for a decree after 31 December 2026, according to law-firm summaries of the act. Existing decree holders keep their exemptions through 31 December 2035 and may choose to move to the new regime. Decree holders also face conditions, including an annual charitable donation, buying a home within two years and filing an annual report. These terms are recent and may change again.
  3. The federal benefit depends on being a bona fide resident, and §937 sets the test. A person must be present in Puerto Rico for at least 183 days in the tax year, must not have a tax home outside Puerto Rico, and must not have a closer connection to the United States or to a foreign country than to Puerto Rico. Owning a home on the island while keeping family, business and daily life in a state can fail the closer-connection test. Section 937(c) also requires people to notify the IRS when they take the position that they became, or stopped being, a bona fide resident.
  4. The usual trap is coins bought before the move. Under 26 CFR 1.937-2(f), gain on certain property owned before becoming a bona fide resident is not Puerto Rico-source income if the person was a US citizen or resident in the ten years before the year of sale. The covered categories include property that does not give rise to any income, a description that on its face fits a coin that pays nothing. The person can elect to treat only the part of the gain that arose while resident as Puerto Rico-source: for marketable securities, using the value on the first day of residence; for other property, by the share of days.
  5. The IRS has taken notice. Its large business and international division lists an active campaign called ‘Puerto Rico Act 22, Individual Investors Act’, named after Act 22, an earlier Puerto Rico investor law. It targets people who claimed the benefits without meeting §937, and people who meet §937 but report US-source income as Puerto Rico-source. The IRS says it uses examinations, outreach and letters. A Puerto Rico decree is a local tax grant; it does not decide federal residence or sourcing, which are federal questions. Reporting duties, such as FBAR for accounts on foreign platforms, also continue (lesson 2.3.6).
  6. A practical check: for each coin you hold, record the date and price you bought it and its value on a fixed date, so that a gain could later be split between the time before and after any change of residence. Keep a calendar of days spent in each place, and a list of where your home, family, bank accounts, driving licence and voter registration are. These records are what an examiner compares with a residence claim. This lesson explains the rules and their catches; it does not recommend moving. A tax professional who knows both the federal and the Puerto Rico rules can apply them to a particular case.

Key facts

  • Under 26 U.S.C. §933, a bona fide resident of Puerto Rico for the entire tax year excludes Puerto Rico-source income from federal gross income.
  • The §937 bona fide residence test requires at least 183 days of presence, no tax home outside Puerto Rico and no closer connection elsewhere.
  • Under 26 CFR 1.937-2(f), gain on certain property owned before becoming a bona fide resident is not Puerto Rico-source if the person was a US citizen or resident in the prior ten years.
  • Act 38-2026 imposes a 4% Puerto Rico tax on dividends, interest and certain capital gains for investor decrees applied for after 31 December 2026.
  • Act 38-2026 extends Puerto Rico’s resident individual investor programme to 31 December 2055.
  • The IRS runs an active compliance campaign called ‘Puerto Rico Act 22, Individual Investors Act’.

Exercise nine, six, three, one

9CollectList up to 9 facts an examiner would look at in a Puerto Rico residence claim, using a real or imagined holder: day counts, homes, family, business, accounts, and when each coin was bought.
6ClusterSort them into 6 groups: presence, tax home, closer connection, pre-move holdings, Puerto Rico decree conditions and reporting.
3DistillReduce the 6 to 3 points where a claim most often breaks down.
1CrystallizeWrite 1 sentence explaining why a Puerto Rico decree does not settle the federal tax on coins bought before the move.

Fact check

Dates, figures and claims checked against the published sources listed below.

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