Why should you consider moving to Puerto Rico?

The American Empire taxes its citizens on their worldwide income, with only a few exceptions. Puerto Rican residency is one of the easiest to put into practice!

One of the most memorable slogans of the American Revolution was “no taxation without representation.” Ironically, the descendants of the colonists had imperial ambitions of their own. Since 1898, Puerto Rico has been a de facto colony of the United States (the Orwellian term used to obscure this political reality is “unincorporated territory”). So Puerto Rico has no voting representation in the House or Senate, and Puerto Ricans can’t vote for president unless they are living in the fifty states or D.C. (I suppose a Puerto Rican could theoretically vote for president via absentee ballot from North Korea if that person had first established residency in the fifty states…but I digress.)

You will be happy to know that even the United States Congress is not so blatantly hypocritical as to impose a direct income tax on residents of Puerto Rico. Section 933 of the Internal Revenue Code specifically excludes bona fide residents of Puerto Rico from U.S. taxation. Puerto Rico has no meaningful representation, therefore, it is generally exempt from U.S. income taxation. (Instead, Congress exploits Puerto Rican residents indirectly, but that’s another story….)

Puerto Rico’s Act 60

Act 60, also known as the "Individual Investors Act," offers significant tax incentives to individuals and businesses who relocate to the island and enter into an agreement with the Commonwealth. Let's focus on the benefits for individuals:

Zero capital gains tax on personal property: Under Act 60, individuals who relocate to Puerto Rico are exempt from paying capital gains tax on any appreciation in value of their assets after they become residents.

Reduced income tax rates: Act 60 also offers reduced income tax rates for eligible individuals. For example, individuals who become residents of the Commonwealth may be eligible for a 4% tax rate on their Puerto Rico-sourced investment income, instead of the typical U.S. federal income tax rates, which can be as high as 37%.

Important caveat: a Puerto Rican resident who derives income from a Chicago business will still pay Federal and IL tax. A Puerto Rican resident who owns a rental property in Philadelphia will still be taxed on that rental income by the Feds and PA, and will still owe capital gains on that income . Income that is “effectively connected” to the fifty states will be taxed by IRS.

Is your publicly traded stock (GOOG, MSFT, AAPL, AMZN, TSLA, META, NVDA) effectively connected to the USA? In the general case, no!

How does the capital gains exemption work in practice?

To the extent that you are “pregnant” with unrealized capital gains (e.g.,, in cryptocurrency or in publicly traded stock) when you establish residency in Puerto Rico, you will owe Federal taxes when you realize those gains. To the extent that you have additional gains over and above your net worth upon arrival in San Juan, those gains are 100% exempt from Federal taxation!

The story of Maribel Miner

I’m going to oversimplify the following story so as not to put the reader to sleep. Tax pros, please forgive me for leaving out important details.

It’s January 2023. Maribel, a California resident, owns 200 BTC with a fair market value of $23,000 per bitcoin. Her average cost was $3,000 per bitcoin.

Maribel strongly believes that BTC will be worth $100,000 sometime in the next decade.

OPTION 1

If Maribel were to sell in January 2023 while remaining a California resident, she would have gross proceeds of $4.6 million dollars. Federal and California taxes would be about $1.42 million (I am using 2022 rates as an estimate), and she would walk away with about $3,180,000 after tax. Not bad! And to be honest, this is what most of my clients do….

OPTION 2 (big tax savings!)

It’s 2025, and BTC hits $100,000! Maribel hits the sell button and receives $20,000,000 cash. Because she was “pregnant” with $4,000,000 of unrealized gains when she moved to Puerto Rico, she is still going to owe $915,000 on her January 2023 unrealized gains.

But the additional appreciation while Maribel was a bona fide resident of Puerto Rico IS NOT TAXED BY THE UNITED STATES! If she has enrolled and been accepted in Puerto Rico’s “Act 60” program, her effective Puerto Rican tax rate may be zero! Maribel walks with almost $19,100,000! She has saved almost $3.7 million in Federal taxes and over $2 million in California taxes!

Fairytale or reality?

My colleagues and I have already had clients who have saved significantly more than Maribel!

Where does Bill Brock fit in?

Typically, I work on Federal compliance with the taxpayer moving to Puerto Rico, and introduce the taxpayer to Puerto Rico-based professionals to handle Commonwealth compliance. There’s a lot I’m leaving out of this story. Iif you are not prepared to deal with at least $50,000 expense and hassle, the savings are not worth pursuing. Island life isn’t for everyone. But if you’re interested, please feel free to schedule a no-obligation thirty-minute consultation.