US Targets Digital Asset Investors Using Puerto Rico as Tax Haven

U.S. Representative Nydia Velázquez has introduced the ‘Fair Taxation of Digital Assets in Puerto Rico Act,’ aiming to put an end to the use of Puerto Rico as a tax haven for digital asset investors. The proposed legislation targets Act 60, which has been enticing investors with a 0% tax rate on capital gains from digital assets, but faces an uphill battle due to a pro-crypto Republican majority in Congress.

• Velázquez targets Act 60’s tax exemptions
• Bill seeks to end Puerto Rico’s status as a crypto tax haven
• Legislation faces challenges in Congress

Act 60, part of Puerto Rico’s Tax Incentives Code, has become a magnet for digital asset investors by offering a 0% tax rate on profits from cryptocurrencies, a 4% corporate tax rate for eligible businesses, and other tax exemptions. Investors who become Puerto Rico residents by December 31, 2035, can enjoy these benefits, which have been marketed as a fiscal paradise. However, Velázquez argues that this wave of crypto investors hasn’t been the economic boon the island hoped for.

Instead, the influx of investors has driven up housing costs and displaced locals, exacerbating economic inequality on an island where nearly 40% of the population lives in poverty. The median home price in San Juan reached $905,000 in January 2024, a figure far beyond the reach of many locals with an average income of $25,621 in 2023. This has led to gentrification and displacement, with investors buying properties and reselling or renting them at prices unaffordable to native Puerto Ricans.

Velázquez’s concerns are echoed by Brandy Gutierrez from the YIP Institute, who argues that Act 60 has exacerbated inequality and displacement, highlighting the need for alternative economic revitalization strategies that do not harm local communities. “Act 60 has not just failed to boost the local economy; it’s been a disaster for many Puerto Ricans,” Gutierrez stated.

Despite these criticisms, Puerto Rico Governor Jenniffer González-Colón has proposed extending Act 60 until December 31, 2055, signaling a stark contrast in vision for the island’s economic future. Crypto investors thought they’d found their fiscal paradise, but Velázquez is ready to play the role of the IRS’s beach patrol.

However, the bill’s journey through Congress looks challenging. With a Republican majority focused on stablecoin regulation and broader digital asset frameworks, the ‘Fair Taxation of Digital Assets in Puerto Rico Act‘ faces significant opposition. The GOP’s pro-crypto stance might keep Puerto Rico’s tax haven allure intact, overshadowing Velázquez’s proposal with initiatives like the GENIUS Act and FIT21.

While the potential $4.5 billion revenue loss from 2020 to 2026 due to Act 60’s tax incentives is a concern, the broader implications of this legislative proposal highlight the tension between attracting digital asset investors and ensuring equitable economic growth. It also underscores the challenges of passing crypto-related legislation in a politically divided Congress.

Playing devil’s advocate, some argue that the influx of investors has brought innovation and job opportunities to Puerto Rico. While Act 60 has its detractors, these potential benefits might be overlooked in the debate over its long-term impact on the island’s economy.

Key Takeaways and Questions

• What is the purpose of the ‘Fair Taxation of Digital Assets in Puerto Rico Act’?

  The purpose is to end the use of Puerto Rico as a tax haven for digital asset investors by requiring them to pay local and federal taxes on profits from cryptocurrencies.

• Why does Representative Velázquez oppose the current tax incentives in Puerto Rico?

  Velázquez argues that the tax incentives have not helped Puerto Rico’s recovery or strengthened the local economy, instead driving up housing costs, displacing locals, and costing the federal government billions in lost tax revenue.

• What is Act 60 and what benefits does it offer?

  Act 60 is part of Puerto Rico’s Tax Incentives Code that offers a 0% tax rate on profits from cryptocurrencies, a 4% corporate tax rate for eligible businesses, and other tax exemptions for investors who become Puerto Rico residents by December 31, 2035.

• What is the likelihood of the ‘Fair Taxation of Digital Assets in Puerto Rico Act’ passing?

  The likelihood is low due to a Republican majority in Congress that is pro-crypto and focused on other legislative priorities like stablecoin regulation and broader digital asset frameworks.

• What are the broader implications of this legislative proposal?

  The proposal highlights the tension between attracting digital asset investors and addressing economic inequalities within Puerto Rico. It also underscores the challenges of passing crypto-related legislation in a politically divided Congress.