United States Representative Nydia Velázquez (D-NY) has proposed legislation aimed at stopping investors from using the U.S. territory of Puerto Rico as a digital asset tax haven.
According to an April 21 Bloomberg report, the Democratic Congresswoman Velázquez introduced the ‘Fair Taxation of Digital Assets in Puerto Rico Act,’ a bill that would change the existing investor-friendly laws in the territory to require certain investors to pay local and federal taxes on capital gains, including from digital assets.
“This wave of crypto investors hasn’t helped Puerto Rico’s recovery or strengthened the local economy,” said Velázquez in a statement to Bloomberg. “Instead, it’s driven up housing costs, pushed out local residents, and added pressure to an island where nearly 40% of people live in poverty — all while costing the federal government billions in lost tax revenue.”
Puerto Rico has become an appealing tax haven for many people in the digital asset industry since 2012 when the territory began allowing exemptions under Act 20 and Act 22 of the Tax Incentives Code, which were later consolidated as Act 60.
Act 60 gives individual resident digital asset investors a tax exemption if they meet specific criteria. Specifically, the Act applies to all individual investors who become ‘Puerto Rico Residents’ on or before 31 December 2035, provided those individuals were not residents of Puerto Rico at any time during the ten-year period preceding the Act’s effective date. Both U.S. and non-U.S. citizens may qualify under the Act, but Puerto Rico residents who are temporarily outside of Puerto Rico do not qualify as they are still deemed to be Puerto Rico residents.
Under the Act, these qualifying ‘bona fide residents’ are subject to a 0% tax rate on capital, meaning no tax on capital gains earned from digital assets, interest, or dividends. Additional benefits include a 4% corporate tax rate for eligible businesses, such as digital asset mining and blockchain services, a 75% exemption on property taxes, and 50% on municipal taxes.
The tax exemption decrees have a 15-year term and have the potential to be renegotiated for an additional fifteen years.
As explained by ‘big four’ accountancy firm PricewaterhouseCoopers (PwC), the purpose of Act 60—also known as ‘The Individual Investors Act’—is to “provide incentives to individuals who have not been residents of Puerto Rico to become residents. In order to encourage the transfer of such individuals to Puerto Rico, the Act exempts from Puerto Rico income tax their passive income.”
Puerto Rico Governor Jenniffer González-Colón recently doubled down on the tax rules, proposing extending Act 60, set to expire in 2035, until December 31, 2055.
Despite the Governor’s eagerness to extend the scheme, Rep. Velazquez’s office reportedly argued that Puerto Rico could lose roughly $4.5 billion in revenue from 2020 to 2026 due to the tax incentives.
For this reason, the congresswoman’s proposed Fair Taxation of Digital Assets in Puerto Rico Act would add a new section to the Internal Revenue Code of Puerto Rico, making income from digital assets subject to federal tax laws.
However, the legislation will likely amount to nothing more than a performative exercise by Velázquez and fellow Democrats to have their objections noted, as it’s almost certain not to get passed by the Republican majority, increasingly pro-crypto Congress.
The Senate and House of Representatives have also made it clear they prioritize stablecoin legislation and a broader regulatory framework for digital assets in the coming months.
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