Act 60 is a framework to attract investment and business to Puerto Rico by providing lucrative tax breaks. The initiative has gained a lot of attention, more recently from the Internal Revenue Service (IRS).
As we discussed earlier, the United States has worked to boost the economy of Puerto Rico, a U.S. territory. The Puerto Rico Incentives Code initiated by Puerto Rico in 2019 offers tax breaks to investors who wish to relocate to the island. Known as “Act 60,” the program is a combination of earlier programs that provides a corporate tax rate of four percent. Act 60 also exempts tax on capital gains for individuals who have correctly established residency on the island.
So, what could possibly go wrong?
Puerto Rico is a foreign jurisdiction, relative to the United States, but its banking and investment interests are not subject to the reporting requirements of the Foreign Account Tax Compliance Act (FACTA). The special nature of Puerto Rico made it attractive to nomadic crypto entrepreneurs who moved to the island following the devastation of Hurricane Maria. Puerto Rico is often called the “crypto capital” for the investors who have purchased property there, as well as for ongoing crypto tourism. But how did investor perks turn into tax crime?
As you might guess, the favorable tax terms gave rise to questions about regulatory abuse by investors in Puerto Rico. In January, the Senate Finance Committee sent a letter to Dan Morehead, who founded the crypto firm Pantera Capital. The gist of the query is whether U.S. investors are taking larger tax breaks than intended by Act 60.
In June, Suresh Gajwani, a business owner, pleaded guilty to making a fraudulent statement to the IRS. Behind the plea was Gajwani’s manipulation of Act 60 to avoid paying $7 million in capital gains taxes. An IRS criminal investigation likely uncovered the false paperwork submitted by Gajwani. He was later sentenced to probation given his poor health and agreed to pay $15.3 million to the IRS in fines, penalties and owed taxes.
In September, the Finance Committee directed another letter to Morehead. Ron Wyden, the ranking member of the Finance Committee, described a sale by Pantera Capital that created more than $1 billion in capital gains which was handled as income from Puerto Rico, and exempt from U.S. taxes. Wyden included a list of information sought from Morehead by the Finance Committee in his letter. In October, the Senate Finance Committee announced its investigation into Morehead and the concerns of Pantera Capital.
Going forward?
The push to investigate crypto crime may be short-lived. It seems likely that the IRS' interest in pursuing crypto investors with ties to Puerto Rico may cool or become highly selective given the current administration's opinion on such matters. That uncertainty, however, does not eliminate compliance risk. If you are considering investment or residency in Puerto Rico, understanding the rules and seeking legal guidance before taking action is critical.
Concerned about domestic or offshore tax compliance?
If you have bitcoin or offshore holdings and are unsure about your reporting obligations, failing to act proactively can expose you to significant penalties and potential criminal liability. Our experienced tax attorneys can help you navigate offshore tax compliance and mitigate potential risks. Schedule a consultation or call us at 440-250-9709. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.
For a deeper dive into offshore tax regulations and the potential risks of noncompliance, download our free ebook, "Offshore Tax Matters Explained."
