IRS investigates US crypto exodus to Puerto Rico

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The U.S. Internal Revenue Service (IRS) is prosecuting tax evaders who abused Puerto Rico’s tax structures, Bloomberg reported July 12.

Puerto Rico has offered significant tax incentives to cryptocurrency traders, hedge fund managers, and other U.S. investors since 2012. This policy has allowed some investors to legally avoid paying federal income tax and no tax on dividends, interest and capital gains income.

In order to qualify for Puerto Rico’s tax policy, investors must reside in Puerto Rico for at least 183 days per year and maintain close local ties. Bloomberg further reported that more than 5,000 US citizens and 3,600 businesses have qualified for tax incentives since 2012.

But despite the otherwise legal nature of Puerto Rico’s tax breaks, investigators are now looking into whether investors have been honest about how long they resided on the island and the sources of their income.

At least two criminal investigations, including one involving a US attorney, could soon see charges laid, Bloombergs sources say. Potential charges would include conspiracy and wire fraud. The surveys target taxpayers as well as promoters, lawyers and accountants who marketed the tax program.

Bloomberg noted that BDO Puerto Rico accountant Gabriel F. Hernandez faced wire fraud charges related to the IRS filing in October 2020. He said any charges resulting from the latest investigations would be the first. since this case, which remains unresolved.

Taxes attract Americans, but not locals

Bloomberg noted that while U.S. investors have benefited from the tax policy, local citizens have expressed backlash against the program. Puerto Ricans allege the policy raises real estate prices and gives preferential treatment to Americans.

Similar reports emerged in 2022 when local residents engaged in protests against the policy. Bloomberg alluded to these protests in its latest report.

Local residents, however, criticize the influx of wealthy Americans for inflating real estate prices and contributing far less in taxes than native Puerto Ricans. Opposition grew, with proposed legislation to reform incentives and sporadic protests against the arrival of these low-tax settlers.

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