Do Puerto Rico residents pay federal tax on capital gain?

Forum|Forum|4 years ago
December 30, 2021
3 replies
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A while ago, I saw an article somewhere online --- some people (trading cryptocurrency) move to Puerto Rico ......

I am wondering if Puerto Rico residents pay federal tax on capital gain? Even if living in some income tax free states, you are still required to pay federal tax (which is much more by comparing to state tax). Why some people moves to Puerto Rico instead of income tax free states? Is it because Puerto Rico residents do not pay federal income tax?

Thanks.

Edit: It seems that Puerto Rico income tax rate is high (more than 30%), much higher than US states. It is still lower than federal income tax rate.

Not A Product Question

Best answer by DaveF1006

According to IRS publication 1321, capital gains are subject to the source of income rules. In this publication, it clearly states that the source of capital gains is determined by the residence of the shareholder provided if the capital gains are distributed by a US Regulated Investment Company (RIC). Since you live in Puerto Rico, such gains are excluded under section 933 of the Internal Revenue Code.

If the gains are not distributed by a RIC and if the source is outside Puerto Rico, then you may need to pay capital gains if you are above the filing threshold. To determine if you are above the filing threshold, please review publication 1321 in the section on who must file.

Critter-3

Read up on taxes for Puerto Rico residents ... https://en.wikipedia.org/wiki/Taxation_in_Puerto_Rico

DaveF1006Answer

According to IRS publication 1321, capital gains are subject to the source of income rules. In this publication, it clearly states that the source of capital gains is determined by the residence of the shareholder provided if the capital gains are distributed by a US Regulated Investment Company (RIC). Since you live in Puerto Rico, such gains are excluded under section 933 of the Internal Revenue Code.

If the gains are not distributed by a RIC and if the source is outside Puerto Rico, then you may need to pay capital gains if you are above the filing threshold. To determine if you are above the filing threshold, please review publication 1321 in the section on who must file.

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VAerAuthor

Employee

@DaveF1006 Thanks. I don't quite understand Regulated Investment Company and I don't live in Puerto Rico. The question is just for curiosity, or maybe I will consider in the future.

If someone is full time trader, only income source is from stock market? Is capital gain from US stock market considered Distribution paid by US Regulated Investment Company? Or is it required for a Puerto Rico resident to pay federal income tax (if stock market capital gain is his only income source)?

DaveF1006

Regulated Investment Companies are those that meets certain tax requirements regarding its assets, income and distributions, and has made an election to be taxed as a RIC. Mutual funds and closed-end investment companies typically are taxed as RICs. I won't go into specifics about the tax requirements but the IRS outlines the definition of an RIC in this link.

Same rules apply if he/she are fulltime stock traders. If this there only source of income and if their stock trades involve RIC regulated companies, the same rules apply as I outlined in my previous post. The transactions are not taxable in Puerto Rico as outlined in publication 1321. To find out if the companies they are trading from are RIC, they will need to look at the prospectus on the company or contact the company to find out if they are an RIC.

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Q

Quasirobo

For assets sold as a bona fide resident of PR, appreciation that occured while a bonafide resident of PR are not taxable by the IRS. Appreciation that occurred before establishing residence (your move date), are taxable by the IRS in the year when you realize those gains. See IRS publication 570 special election rules for details on this: https://act60.co/t/what-is-bifurcation/396

Separately, there are tax incentives offered by the government of Puerto Rico that exempt you from local Puerto Rican taxes on these gains, which are comparable to the rates in other states . These incentives are called act 20, 22, and 60, and there are several requirements such as an annual report and filing fee, and the annual charitable donation of $10,000, and a residence requirement in Puerto Rico. Capital gains are taxed at 0% and corporate income at 4% under this contract with the Puerto Rican government. You can read more about it here: https://act60.co/t/the-ultimate-guide-to-act-20-22-60-tax-incentives/201