Cryptocurrency: Tax Havens Being Sought By HODLers

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Crypto Rich Flock To Puerto Rico, World's New Luxury Tax Haven Paradise

https://www.bloomberg.com/news/features/2021-12-11/crypto-rich-are-moving-to-puerto-rico-world-s-new-luxury-tax-haven
https://news.bloombergtax.com/daily-tax-report/irs-seizes-foothold-on-puerto-rico-tax-haven-audits
https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-Compliance-Agenda.pdf


President Joe Biden says the 1980s Reagan era trickle-down economics
doesn't work as he wants to roll back tax cuts for the rich. The
impending clampdown has spooked top affluent investors, including
crypto investors, who are descending to Puerto Rico to dodge tax
hikes.

Puerto Rico passed two important tax bills in 2012 that has
transformed the island into a cryptocurrency tax haven paradise. Under
Act 22 of its local tax code, the Caribbean island and unincorporated
U.S. territory offers full exemption from all local taxes on passive
income to new residents. Act 20, provides a 4% corporate tax rate and
exemptions on dividends. This is a much better deal than the U.S.,
where investors pay 20% in long-term capital games and 37% in
short-term gains.

The explosion of remote work, expansion of crypto markets, and tax
haven have made the Caribbean island attractive for crypto investors.

    That was the case for Anthony Emtman, who left Los Angeles behind
and bought a condo at the resort in March. The chief executive officer
of Ikigai Asset Management is now a part of a burgeoning crypto
community along Puerto Rico's north shore, where the tropical weather
is just a bonus.

    Emtman and his crypto peers take a page out of hedge funds' books
and seek residence on the island to reap huge tax savings. - Bloomberg

The rise in crypto markets has made it an easy target for the Biden
administration and Democrats to tax the living hell out of the
industry. Smart money understands what's coming and wants no parts of
it.

Crypto funds Pantera Capital and Redwood City Ventures have moved to
the tropical island to escape U.S. taxes. Facebook product
manager-turned-whistleblower Frances Haugen recently disclosed that
she moved to Puerto Rico to be with her crypto buddies.

Now, "it's not just, 'Move to Puerto Rico to save tax,'" said Giovanni
Mendez, a corporate tax attorney. "It's, 'Move to Puerto Rico because
everybody is there.'"

Puerto Rico's tax laws were put in place to help its struggling
economy a decade ago. Hedge funds have been shifting operations from
the Northeast U.S. to the island for at least half a decade or more.

    So far this year, Puerto Rico has received more than 1,200
applications — a record — through its Individual Investors Act, which
exempts new residents from paying taxes on capital gains, according to
the island's Department of Economic Development and Commerce. The
number of U.S. mainlanders seeking Puerto Rico's tax breaks has
tripled this year.

    Another 274 corporations, LLCs, partnerships and other entities
were approved for the Exports Services Act, which provides a 4%
corporate tax rate and a 100% exemption on dividends. Both fall under
Puerto Rico's Act 60, a group of tax breaks that were packaged
together in 2019 to attract investment not just from crypto, but
finance, tech and other industries. -Bloomberg

Michael Terpin, the founder of BitAngels, moved to the island from Las
Vegas in 2016. He's known as the "messiah" for convincing people to
move to the island.

Crypto investors are interested in several areas on the island: Bahia,
which resides 26 miles east of San Juan, and the Ritz-Carlton Dorado
Beach resort.

The wave of new newcomers has lifted property markets in the country.
Francisco Diaz Fournier, the founding partner of Luxury Collection
Real Estate, said some properties are now selling for more than $20
million.

    "Right now we are selling a home in Dorado Beach for $27 million,
and another one is going for $29 million," Fournier said.

Blanca Lopez, the founder of Gramercy Real Estate Group, said Bahia
prices per square foot have doubled.

    "We are seeing prices north of $3,000 per square foot," Lopez
said. She said homes in Condado are between $1,400 to $1,500 per
square foot, an approximately 35% increase from a year ago.

Meanwhile, inventory is running low for high-end homes.

    "We don't have room, at least not in Dorado, Bahia or Condado,"
said Fournier. "The market is spreading out, so we're seeing
spillovers in areas of San Juan where people wouldn't look before."

So far, the tax incentives appear to be working. Crypto investors
flock to the island to dodge Biden's proposed tax increases. However,
the IRS has a message for net-worth individuals, corporations, and
cryptocurrency traders moving to the island: 'We're waiting for
you...'

The bad news is the push for statehood would kill its tax system. In
the meantime, wealthy crypto investors don't care and seek tax shelter
on the tropical island.







Hedge fund managers have been descending on Puerto Rico in the hopes
of dodging Biden tax hikes, and to take advantage of tax incentives
rolled out in 2012 which have lured high net-worth individuals,
corporations and cryptocurrency traders alike.

If you fall under any of the above and you're falsely claiming to be a
resident of Puerto Rico, the IRS has a message for you: 'We're waiting
for you...'

According to Bloomberg Tax, the agency has been the focus of a
"sweeping" review to examine individuals who took advantages of the
tax incentives. According to the report, "More than 4,000 mainland
U.S. residents and firms have moved to the territory between 2012 and
2019, revealing potentially hundreds of millions of dollars in lost
tax revenue to the U.S. government, according to an IRS report
delivered to Congress."

    At issue are taxpayers who may have excluded income subject to
U.S. tax, or failed to file and report income altogether when they
moved to Puerto Rico, according to the IRS notice. The agency is also
targeting those who claim to be bona fide residents of Puerto Rico but
may be “erroneously reporting” U.S. income to evade taxes.

    The IRS’s push is taking place as Biden’s proposed tax increases
have triggered moves by America’s wealthiest from high-tax states like
New York and California, while hedge funds like Izzy Englander’s
Millennium Management and ExodusPoint Capital Management have moved to
establish subsidiaries on the island. An ExodusPoint spokesman
declined to comment, while a representative for Millennium did not
respond. -Bloomberg Tax

Tax attorneys who advise HNW clients on Puerto Rican tax incentives
are already reporting that they've received requests for information
from the IRS, while more audits are expected now that the US tax
filing deadline has passed.

"The IRS doesn’t start a campaign and not follow through," said
international tax layer J. Clark Armitage. "There are going to be a
lot of audits."

The Puerto Rico crackdown is part of a wider sweep by the Treasury
Department, which estimated that wealthy taxpayers are hiding billions
of dollars in income. According to Treasury Secretary Janet Yellen,
the tax gap between what's owed and what's collected could grow to $7
trillion over the next decade if nothing is done.

"One of the purposes of a campaign is to stop whatever fraud is going
on while you’re doing the investigations and audits," said former IRS
commissioner John Koskinen. "You like to stop people in their tracks."

    Campaigns by the IRS often take years to organize, as agents begin
to detect factual patterns that indicate a significant loss of revenue
due to non-compliance. In the case of Puerto Rico, much of the focus
will be on establishing whether individuals are truly island residents
and whether they properly sourced income to Puerto Rico.

    Unlike previous IRS efforts, the campaign’s origins began in
Congress after lawmakers requested a report from the agency in their
2020 appropriations bill over concerns Puerto Rico’s tax laws may be
enabling tax avoidance and that federal and state governments were
being shorted revenue.

    “Every revenue authority everywhere is facing the same issue of
needing to find an efficient process when there are fewer resources
and budget constraints,” said Sharon Katz-Pearlman, global head of
dispute resolution and controversy for KPMG.

    The IRS’ report to Congress calculated that more than 1,924
applicants—corporations, LLCs, partnerships, and other types—had been
granted tax benefits under the Exports Services Act (formerly known as
Act 20) as of March 2020 based on partial information provided by
Puerto Rico. Act 20 offers entities a 4% corporate rate on business
income and 100% tax exemption on dividends. That provision along with
the Individual Investors Act have now been consolidated into a new
incentive law to attract individuals and investments to the island.







https://www.sovereignman.com/trends/what-happens-if-puerto-rico-became-a-state-29287/

What Happens If Puerto Rico Becomes A State?

In late 2018, after more than seven fantastic years of living in
Chile, I decided to move to Puerto Rico to take advantage of the
island’s incredible tax incentives.

By moving to Puerto Rico, I traded my right to vote in US federal
elections for a 4% tax rate. And I’m pretty confident I got the better
end of that deal.

I’ve written about this quite extensively– but stick with me, because
there’s a new twist to the story.

As we’ve covered before, Puerto Rico is a territory of the United States.

This means that the island falls under the jurisdiction of the US
government for certain matters, like immigration and national defense.

But it operates independently in other matters– like taxes.

In fact, taxes is probably the most important one: Puerto Rico has its
own tax system that’s completely independent from the United States.

So residents of Puerto Rico can disconnect entirely from the US tax
system, as long as their income is generated from Puerto Rican
sources.

This is a critical point: what constitutes Puerto Rican income?

According to the tax code, this includes dividends paid by a Puerto
Rican business, as well as capital gains from certain investments like
stocks and bonds.

So if you live in Puerto Rico and make most of your money from your
Puerto Rican business, or you trade stocks, commodities, crypto, etc.,
then in most cases your income would be considered Puerto Rican in
origin.

If that’s the case, you are generally no longer required to pay US
federal taxes on that income. In fact you might not even have to file
a federal tax return at all.

Instead, you would pay Puerto Rican taxes. And that’s where the
incentives come in.

Several years ago the Puerto Rican government established a number of
extraordinary tax incentives, specifically targeted at those two
cases–

Traders, whose primary source of income is capital gains from their
financial investments, literally pay ZERO tax.

And entrepreneurs with qualifying businesses are only required to pay
a 4% corporate tax rate (plus a tiny municipal rate that’s just a
fraction of a percent, depending on which city you live in.)

Plus, any dividends that your company pays to you are tax free as long
as you live in Puerto Rico.

This is an enormous benefit.

If you live in the US mainland and operate an LLC, you’d pay, say, a
25% to 40% average tax rate on business income, not counting
self-employment tax.

If you run your business through a corporation, you’d pay 21%
corporate profits tax, plus an additional 15% to 20% dividend tax,
plus the 3.8% Obamacare surtax, plus state and local tax.

In Puerto Rico it’s just 4%. Call it 4.5% to account for the local
municipal tax. But that’s it. No extra dividend tax. No Obamacare
surtax.

You put more than 95% of your earnings in your pocket.

This isn’t some obscure loophole or shady tax shelter. It’s the law.

Section 933 of the United States federal tax code specifically exempts
US citizens from federal tax on their Puerto Rican sourced income, as
long as they are bona fide Puerto Rico residents .

(Note that if you have US-sourced income, or income from foreign
countries, that income would still be taxable by the IRS. Section 933
only excludes Puerto Rican income from US federal tax.)

And in Puerto Rico, the incentives are also codified by law.

In fact, once your tax incentive application is approved, you actually
sign a contract with the government and are issued an individual tax
decree.

So even if they change the law later, you’d still be grandfathered in
under the old rules, and continue to enjoy your current tax benefits.

Now, here’s the twist: there are very, very few events that could
trigger a problem with your tax incentives. But one of them just
became more likely:

Puerto Rico is currently a US territory. But there’s been a movement
for quite some time for Puerto Rico to become a state… similar to how
there’s a statehood movement for Washington DC.

Just like DC, Puerto Rico tends to skew quite liberal politically. So
the blue party in the US is very much in favor of Puerto Rico and DC
becoming states.

(I hate breaking down the world into red and blue, but in this case,
it’s relevant.)

It means they would likely pick up 2 more senate seats for each one,
nearly guaranteeing the Democrats control of the United States Senate.

Several months ago, in fact, the House of Representatives passed a
bill authorizing DC to become the 51st state. It was killed in the
Senate.

But it shows the movement is real.

Last week, Puerto Ricans had their own election. And statehood was on
the ballot.

The final tally showed that a majority of Puerto Ricans want to become
a state. The Democratic party wants them to become a state.

And if that happens, the benefits would go away. Sure, your company
would still be subject to a 4% tax rate in Puerto Rico. But then you’d
have to pay US federal income tax on top of that.

So statehood pretty much kills the deal.

But does last week’s vote mean that Puerto Rico will become a state?

No, not necessarily.

Statehood would require approval by the US House of Representatives.
Then the Senate would have to approve it.

And in order for that to happen, the Democrats would need to take
control of the Senate AND agree to eliminate the filibuster.

Then the President would need to sign it into law.

So, it’s possible this could happen, but it’s not especially likely.

And even if it did happen, there would still be several years of a
transition process.

So, bottom line, the tax incentives in Puerto Rico are still valid and
extremely valuable.

And even if they only exist for another 3-5 years, they’re still
definitely worth considering.