U.S. Lawmaker Proposes Bill to End Puerto Rico's Crypto Tax Haven Status

TLDR

Table of Contents

Representative Nydia Velázquez introduced the Fair Taxation of Digital Assets in Puerto Rico Act to close tax haven loopholes for crypto investors
The bill would make cryptocurrency income in Puerto Rico subject to federal tax rules
Puerto Rico could lose approximately $4.5 billion in revenue from 2020 to 2026 due to existing tax incentives
Puerto Rico’s Governor proposed extending Act 60 tax benefits until 2055 but adding a 4% capital gains tax for new applicants
High-profile crypto figures like Dan Morehead, Brock Pierce, and Logan Paul have relocated to Puerto Rico to benefit from tax breaks

Democratic Representative Nydia Velázquez has introduced new legislation aimed at preventing cryptocurrency investors from using Puerto Rico as a tax haven. The bill, called the Fair Taxation of Digital Assets in Puerto Rico Act, would change existing laws to require crypto investors in the U.S. territory to pay both local and federal taxes on capital gains from digital assets.

The proposed legislation comes after Puerto Rico’s Governor Jenniffer González-Colón suggested extending the territory’s tax incentives program while adding a modest 4% capital gains tax for new applicants. This rate is far lower than the mainland U.S., where investors can pay up to 37% on short-term gains.

Rep. Velázquez argues that the current system has harmed Puerto Rico rather than helped it. “This wave of crypto investors hasn’t helped Puerto Rico’s recovery or strengthened the local economy,” she said, according to Bloomberg reports.

Impact on Puerto Rico’s Economy

The tax incentives, established in 2012 under Acts 20 and 22 (later consolidated as Act 60), have attracted many wealthy crypto investors to the island. Well-known figures in the industry who have moved to Puerto Rico include Pantera Capital founder Dan Morehead, crypto advocate Brock Pierce, and internet personality Logan Paul.

However, critics argue these tax benefits have had negative effects on the local population. Rep. Velázquez claims the influx of wealthy investors has “driven up housing costs, pushed out local residents, and added pressure to an island where nearly 40% of people live in poverty.”

According to estimates from Rep. Velázquez’s office, Puerto Rico could lose around $4.5 billion in revenue between 2020 and 2026 due to these tax incentives. This loss occurs despite the territory’s ongoing economic challenges and recovery needs.

Competing Proposals

While Rep. Velázquez seeks to close what she calls a “critical loophole,” Puerto Rico’s Governor has put forward a different approach. Governor González-Colón recently proposed extending Act 60 tax benefits, which are set to expire in 2035, until 2055.

The Governor’s plan would add a 4% capital gains tax rate for new applicants. This rate is much lower than typical U.S. rates, which range from 20% for long-term gains to 37% for short-term gains.

Supporters of the current tax incentives argue they bring high-net-worth individuals with financial technology expertise to the struggling island. They see this as beneficial for Puerto Rico’s developing economy and tech sector.

Political Challenges

The bill faces political hurdles in the Republican-controlled Congress. Following Donald Trump’s election victory, cryptocurrency regulation has taken a different direction, with the President embracing crypto and promising to reduce regulations affecting digital assets.

The legislation introduced by Democratic lawmakers would need bipartisan support to advance, especially as Congress focuses on extending the 2017 tax cuts. The political climate suggests passage of the bill may be difficult in the current environment.

Both the House and Senate are expected to consider votes on stablecoin legislation and a broader crypto regulatory framework in the coming months. These initiatives may take priority over tax-related changes for Puerto Rico.

The outcome of this legislative effort will impact not just crypto investors but also Puerto Rico’s economy and its residents. The debate highlights the tension between attracting wealthy investors and ensuring tax policies benefit the broader population.

The Fair Taxation of Digital Assets in Puerto Rico Act represents the latest attempt to address concerns about tax fairness in the cryptocurrency industry, as lawmakers continue to grapple with how to regulate this rapidly evolving sector.

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